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HARVARD   UNIVERSITY 
CAMBRIDGE,  MASS.,  U.S.A. 


HARVARD   ECONOMIC  STUDIES 

PUBLISHED   UNDER  THE  DIRECTION  OF 
THE  DEPARTMENT  OF  ECONOMICS 


VOL.  IV 


RAILROAD 
REORGANIZATION 


BY 

STUART  DAGGETT,  PH.D. 

INSTRUCTOR   IN  ECONOMICS   IN   HARVARD   UNIVERSITY 


BOSTON    AND   NEW    YORK 

HOUGHTON,  MIFFLIN   AND   COMPANY 
pres?,  Cambridge 
1908 


COPYRIGHT   1908  BY  THE  PRESIDENT  AND   FELLOWS  OF  HARVARD  COLLEGE 
ALL   RIGHTS   RESERVED 

Published  May  iqoS 


PREFACE 

IT  sometimes  happens  that  experiences  long  since  past  seem  to  be 
repeated,  and  that  knowledge  apparently  forgotten  proves  again  of 
service.  This  is  illustrated  by  the  subject  of  railroad  reorganization. 
In  the  years  between  1893  and  1899  an  imposing  group  of  American 
railroads  passed  into  receivers'  hands.  In  1893  alone  more  than 
27,000  miles,  with  an  aggregate  capitalization  of  almost  $2,000,000,- 
ooo,  were  taken  over  by  the  courts,  and  in  the  following  years  the 
amount  was  largely  increased.  Foreclosure  sales  aggregated  10,446 
miles  in  1895,  12,355  in  1896,  and  40,503  between  1894  and  1898. 
Among  the  more  important  failures  were  those  of  the  Richmond  & 
West  Point  Terminal,  the  Reading,  the  Erie,  the  Northern  Pacific, 
the  Atchison,  and  the  Baltimore  &  Ohio ;  —  to  say  nothing  of  the 
Norfolk  &  Western,  the  Louisville,  New  Albany  &  Chicago,  the 
Ann  Arbor,  the  Seattle,  Lake  Shore  &  Eastern,  the  Pecos  Valley, 
and  many  other  smaller  lines. 

The  railroads  which  failed  between  1893  and  1898  were  subse- 
quently reorganized.  In  order  to  restore  the  equilibrium  between 
income  and  outgo  the  companies  turned  to  their  creditors,  and  de- 
manded the  surrender  of  a  part  of  the  rights  of  which  bondholders 
were  then  possessed.  This  demand  the  creditors  were  forced  to 
concede.  Some  of  them  yielded  without  legal  compulsion,  assenting 
to  "  voluntary  reorganizations";  some  insisted  upon  the  sale  of  the 
property  securing  their  loans,  but  without  escaping  the  loss  which 
fell  upon  their  more  pliant  associates.  Much  injustice  to  individuals 
came  to  light  at  this  time.  Men  who  had  invested  in  good  faith  were 
obliged  to  sacrifice  their  holdings  through  no  fault  of  their  own. 
The  savings  of  years  were  swept  away.  The  demand  of  the  rail- 
roads was  one,  nevertheless,  which  the  courts  supported,  and  rightly. 
The  companies  could  not  be  operated  unless  the  creditors  were 
deprived  of  part  of  their  legal  rights.  At  the  same  time,  these  rights 
no  longer  had  a  material  basis  on  which  to  rest,  and  their  surrender 
meant  but  the  recognition  of  a  loss  which  had  already  taken  place. 

Most  of  the  reorganizations  were  completed  by  the  year  1899. 
Since  that  date  the  improvement  in  railroad  earnings  has  been  mar- 

248429 


vi  PREFACE 

vellous.  Gross  earnings  from  operation  were  $1,300,000,000  in 
1899,  they  were  $2,300,000,000  in  1906,  the  last  year  for  which  the 
figures  of  the  Interstate  Commerce  Commission  are  at  present  avail- 
able. Total  income,  after  the  deduction  of  operating  expenses,  was 
$605,000,000  in  1899,  and  $1,046,000,000  in  1906.  It  is  not  to  be 
wondered  at  that  the  distress  of  the  years  1893-9  has  not  been  dup- 
licated during  the  years  1900-7.  On  the  contrary,  weak  roads  have 
had  opportunity  to  strengthen  their  positions,  and  strong  ones  have 
spent  enormous  sums  for  improvements,  and  have  declared  liberal 
dividends  besides.  In  no  year  save  1905  has  the  new  mileage  put 
into  receivers'  hands  been  greater  than  800  miles,  and  in  but  one 
has  the  mileage  sold  at  foreclosure  equalled  that  figure.  Operating 
expenses  have  increased  because  the  amount  of  business  has  ex- 
ceeded the  ability  of  the  railroads  to  handle  it.  Equipment  has  been 
so  inadequate  as  to  provoke  drastic  legislation  by  the  legislatures 
of  many  states;  yards  and  terminals  have  been  crowded  until  a 
prominent  railroad  officer  has  declared  the  expenditure  of  over  five 
billion  dollars  to  be  necessary  to  restore  the  equilibrium  between 
facilities  and  traffic. 

These  conditions  have  caused  the  earlier  problems  of  failure  and 
reorganization  to  be  lost  to  view.  Nevertheless,  the  financial  panic 
of  October,  1907,  and  the  recession  in  activity  which  has  brcome 
more  and  more  apparent  since  that  time,  have  again  brought  these 
problems  forward.  The  Seaboard  Air  Line,  one  of  the  important 
railroad  systems  of  the  South,  failed  on  January  5,  1908.  The 
Chicago  Great  Western  followed  three  days  later.  The  Detroit, 
Toledo  &  Ironton,  the  Chicago,  Cincinnati  &  Louisville,  the  In- 
ternational &  Great  Northern,  the  Western  Maryland,  and  the 
Macon  &  Birmingham  have  since  been  put  in  receivers'  hands.  In 
all,  the  operation  of  5938  miles  of  railroad,  with  a  capitalization  of 
nearly  $415,000,000,  and  total  liabilities  of  $462,000,000,  has  been 
taken  over  by  the  courts  during  the  first  ten  weeks  of  1908.  Whether 
this  is  but  the  beginning  of  still  more  extended  trouble  it  is  of  course 
impossible  to  say.  There  are  a  number  of  weak  lines  in  the  American 
railroad  system,  and  the  difficulty  in  obtaining  credit  is  bound  to  re- 
veal weaknesses  where  they  exist.  At  present  new  loans  have  for 
some  months  been  difficult  to  obtain,  and  even  strong  railroads  have 
resorted  to  the  issue  of  short  time  notes.  The  Erie,  indeed,  escaped 


PREFACE  vii 

bankruptcy  on  April  8, 1908,  only  through  the  timely  aid  of  important 
bankers  who  took  up  its  maturing  notes.  This  points  to  serious  con- 
sequences for  the  weaker  lines.  It  is  true,  on  the  other  hand,  that 
American  railroads  are  generally  in  better  financial  and  physical 
condition  than  they  were  in  1893.  It  is  not  probable  that  any  rail- 
road collapse  will  be  so  widespread  now  as  it  was  then.  Whether 
this  be  so  or  not,  the  failure  of  nearly  6000  miles  of  railroad  in  ten 
weeks  invests  reorganization  problems  at  present  with  an  import- 
ance which  they  have  not  had  for  ten  years.  How,  it  will  be  asked, 
shall  the  financial  operations  necessary  to  reorganization  be  per- 
formed? What  methods  shall  be  adopted,  what  dangers  avoided, 
and  what  results  expected? 

The  experience  of  earlier  years  will  provide  answers  to  many  of 
the  questions  asked  in  1908.  In  the  hope,  therefore,  that  a  study  of 
railroad  reorganization,  on  which  the  author  has  been  intermittently 
engaged  during  the  last  six  years,  will  prove  of  service,  the  following 
pages  have  been  published.  They  discuss  in  some  detail  the  finan- 
cial history  of  the  seven  most  important  railroads  which  failed  from 
1892-6,  and  that  of  one  railroad,  the  Rock  Island,  which  was  re- 
organized in  1902;  and  summarize  in  a  final  chapter  the  character- 
istics of  the  various  reorganizations  in  which  these  roads  have  be- 
come involved.  In  some  respects  the  history  of  each  road  considered 
is  peculiar  unto  itself.  The  Reading  had  coal  to  sell,  the  Atchison 
did  not.  The  Southern  ran  through  a  sparsely  settled  country,  the 
Baltimore  &  Ohio  through  a  thickly  settled  one.  The  Erie  has 
never  recovered  from  the  campaigns  of  Gould,  Drew,  and  Fisk 
from  1864-72,  the  Northern  Pacific  was  not  opened  until  1883.  In 
other  respects,  however,  the  roads  have  had  much  in  common. 
Excepting  only  the  Rock  Island,  each  of  them  has  found  itself  at 
one  time  or  another  unable  to  pay  its  debts,  and  has  had  to  seek 
measures  of  relief.  The  problems  of  the  different  companies  at 
these  times  have  been  strikingly  alike.  However  caused,  their  finan- 
cial difficulties  have  been  expressed  in  high  fixed  charges,  and, 
usually,  in  excessive  floating  debts.  Greater  annual  obligations  have 
been  assumed  than  the  roads  could  meet,  and  current  liabilities  have 
accumulated  while  pressing  demands  have  been  satisfied.  To  this 
state  of  affairs  the  remedy  has  been  sought  in  comprehensive  ex- 
changes of  old  securities  for  new.  The  exchanges,  it  is  true,  have 


viii  PREFACE 

been  carried  out  in  different  ways,  and  the  collateral  expedients 
employed  have  not  been  the  same.  To  similar  problems  different 
solutions  have  been  applied.  It  is  possible,  for  this  very  reason,  for 
a  careful  study  of  the  alternative  reorganization  methods  which  have 
been  developed  to  point  out  some  policies  which  have  been  danger- 
ous, and  to  make  clear  others  which  are  both  just,  and  likely  to  be 
successful.  Such  a  study  also  throws  light  upon  the  history  of  the 
companies  upon  which  it  is  based. 

For  the  way  in  which  the  different  roads  have  been  handled,  the 
reader  is  referred  to  the  text.  The  order  of  treatment  is  very  roughly 
determined  by  geographical  location ;  that  is,  the  Eastern  roads  are 
first  considered,  then  the  Southern,  and  then  the  Western.  Each 
chapter,  except  the  last,  should  be  examined  as  a  "case"  in  reor- 
ganization experience,  and  as  part,  therefore,  of  a  united  whole. 
No  one  has  been  so  continuously  with  his  work  as  the  author  him- 
self, and  no  one  can  more  keenly  realize  its  defects.  It  is  offered  as 
a  contribution  in  a  field  in  which  very  little  has  as  yet  been  done, 
and  it  is  hoped  that  it  will  prove  of  value  to  those  concerned  with 
reorganization  plans,  as  well  as  to  those  interested  in  the  develop- 
ment of  corporation  finance  during  the  last  generation. 

Without  the  unselfish  and  intelligent  assistance  of  the  writer's 
Mother,  the  preparation  of  this  book  would  have  been  long  delayed. 
To  her,  first  of  all,  thanks  are  due.  To  Professor  William  Z.  Ripley, 
of  Harvard  University,  should  be  made  warm  acknowledgment  of 
his  constant  interest  and  helpful  suggestions.  To  the  Carnegie  In- 
stitution the  author  is  indebted  for  grants  in  aid  of  research  in  this 
special  field.  Grateful  acknowledgment  should  also  be  made  of 
gifts  by  friends  of  the  University  to  cover  the  expenses  of  publication. 


CONTENTS 

CHAPTER  I 
BALTIMORE  &  OHIO i 

Early  history  —  Extension  to  Chicago  —  Trunk-line  rate  wars  —  Effect 
on  the  company  —  Extension  to  New  York  —  Sale  of  bonds  to  pay  off 
floating  debt  —  Unsatisfactory  traffic  conditions  —  Receivership  —  Mr. 
Little's  report  —  Reorganization  —  Subsequent  history. 

CHAPTER  II 
ERIE 34 

Early  history  —  Reorganization  —  Wall  Street  struggles  —  Financial  diffi- 
culties —  Second  reorganization  —  Development  of  coal  business  —  Ex- 
tension to  Chicago  —  Grant  &  Ward  —  Financial  readjustment  —  New 
York,  Pennsylvania  &  Ohio  —  Third  reorganization  —  Later  history. 

CHAPTER  III 
PHILADELPHIA   &  READING 75 

Early  history  —  Purchase  of  coal  lands  —  Funding  of  floating  debt  — 
Failure  —  Struggles  between  Gowen  and  his  opponents  —  Reorganization 

—  Second  failure  and  reorganization. 

CHAPTER  IV 
PHILADELPHIA   &  READING 118 

Difficulties  of  the  Coal  &  Iron  Company  —  McLeod's  policy  of  extension 

—  Collapse  of   this  policy  —  Failure  of   company  —  Summary  of  subse- 
quent history. 

CHAPTER  V 
THE  SOUTHERN 146 

Richmond  &  Danville  —  East  Tennessee,  Virginia  &  Georgia  —  Form- 
ation of  the  Southern  Railway  Security  Company  —  Growth  and  combin- 
ations —  Failure  and  reorganization  of  the  East  Tennessee  —  Reversal  of 
position  between  the  Richmond  &  Danville  and  the  Richmond  &  West 
Point  Terminal  —  Acquisition  of  the  Central  of  Georgia  —  Failure  and 
reorganization  of  the  whole  system  —  Subsequent  development. 

CHAPTER  VI 
ATCHISON,  TOPEKA   &  SANTA  FE 192 

Charter  —  Strategic  extensions  —  Competitive  extensions  —  Effect  on 
finances  —  Raise  in  rate  of  dividend  —  Reorganization  of  1889  —  Acquisi- 
tion of  the  St.  Louis  &  San  Francisco  and  of  the  Colorado  Midland  — 
Income  bond  conversion  —  Receivership  —  English  reorganization  plan 

—  Mr.  Little's  report  —  Final  reorganization  plan  —  Sale  —  Subsequent 
history. 


X  CONTENTS 

CHAPTER  VII 
UNION  PACIFIC 220 

Acts  of  1862  and  1864  —  High  cost  of  construction  —  Forced  combin- 
ation with  the  Kansas  Pacific  and  the  Denver  Pacific  —  Unprofitable 
branches  —  Adams's  administration  —  Financial  difficulties  —  Debt  to  the 
Government  —  Receivership  and  reorganization  —  Later  history. 

CHAPTER  VIII 
NORTHERN  PACIFIC      .    .    .    .    .' 263 

Act  of  1864  —  Failure  and  reorganization  —  Extension  into  the  North- 
west —  Villard  and  the  Oregon  &  Transcontinental  Company  —  Lack 
of  prosperity  —  Refunding  mortgage  —  Lease  of  Wisconsin  Central  — 
Financial  difficulties  —  Receivership  —  Legal  complications  —  Reorgan- 
ization —  Subsequent  history. 

CHAPTER  IX 
ROCK  ISLAND 311 

Charter — Early  prosperity  —  Reorganization  of  1880  —  Conservative 
policy  —  Extension  —  Pays  dividends  throughout  the  nineties  —  Moores 
obtain  control  —  Reorganization  of  1902  —  Further  extensions  —  Im- 
paired credit  of  the  company. 

CHAPTER  X 
CONCLUSION 334 

Definition  of  railroad  reorganization  —  Causes  of  the  financial  difficulties 
of  railroads  —  Unrestricted  capitalization  and  unrestricted  competition  — 
Problem  of  cash  requirements  —  Problem  of  fixed  charges  —  Distribution 
of  losses  —  Capitalization  before  and  after  —  Value  of  securities  before 
and  after  —  Provision  for  future  capital  requirements  —  Voting  trusts  — 
Summary. 


RAILROAD    REORGANIZATION 


RAILROAD  REORGANIZATION 


CHAPTER  I 

BALTIMORE    &   OHIO 

Early  history  —  Extension  to  Chicago  —  Trunk-line  rate  wars  —  Effect  on  the 
company  —  Extension  to  New  York  —  Sale  of  bonds  to  pay  off  floating  debt  — 
Unsatisfactory  traffic  conditions  —  Receivership  —  Mr.  Little's  report  —  Re- 
organization —  Subsequent  history. 

THE  Baltimore  &  Ohio  Railroad  was  the  first  important  railway 
company  to  be  incorporated  in  the  United  States.  It  was  designed 
to  aid  the  city  of  Baltimore  in  securing  the  Western  trade,  and  not 
only  private  citizens  but  the  city  of  Baltimore  and  the  state  of  Mary- 
land early  subscribed  to  its  stock.  When  in  the  course  of  con- 
struction it  became  expedient  to  extend  into  Virginia,  the  city  of 
Wheeling  and  the  state  of  Virginia  likewise  subscribed,  though  the 
action  of  the  latter  was  subsequently  withdrawn.1  As  a  result 
the  funds  required  for  first  construction  were  obtained  from  the 
sale  of  stocks  instead  of  bonds.  In  1844,  seventeen  years  after 
the  granting  of  the  charter,  the  annual  report  showed  $7,000,000 
in  stock  as  against  $985,000  in  6  per  cent  bonds;  while  in  1849, 
though  the  loans  had  been  increased,  they  yet  stood  in  the  propor- 
tion of  one  to  two.2 

On  December  i,  1831,  the  first  train  was  run  over  the  line,  then 
72 J  miles  in  length.3  The  early  history  of  the  road  does  not  much 
concern  us.  It  was  one  of  steady  growth,  not  through  an  unsettled 
territory,  as  with  our  Western  roads,  but  through  a  country  the 
industries  of  which  were  already  established.  Tracks  led,  not  into 
prairies,  but  to  populous  cities;  and  the  future  of  the  company, 
once  the  initial  difficulties  should  have  been  overcome,  was  at  no 

1  Milton  Reizenstein,  The  Economic  History  of  the  Baltimore  &  Ohio  Railroad, 
Johns  Hopkins  University  Studies,  July-August,  1897. 

2  Reizenstein  estimates  the  original  cost  of  the  first  379  miles  to  have  been  $37,612 
per  mile,  and,  adding  the  cost  of  reconstruction  and  extension  to  1853,  he  gets  a  figure 
of  $41,237  per  mile.   Vide  infra,  p.  75. 

3  6th  Annual  Report,  1832,  p.  4.  , 


2  RAILROAD  REORGANIZATION 

time  uncertain.  Thus  extension  to  Cumberland  increased  the  gross 
receipts  from  $426,492  to  $575,235,  and  that  to  Wheeling  in  1853 
likewise  brought  a  great  increase  in  traffic. 

The  Civil  War  bore  upon  the  Baltimore  &  Ohio  heavily  because 
of  the  peculiar  location  of  its  mileage.  On  May  28,  1861,  possession 
was  taken  by  the  Confederates  of  more  than  one  hundred  miles 
of  the  main  stem,  embracing  chiefly  the  region  between  the  Point  of 
Rocks  and  Cumberland.1  Government  protection  was  temporarily 
restored  in  1862,  but  raids  occurred  until  the  end  of  the  war.  Each 
time  the  Confederates  occupied  the  line  they  tore  it  up,  and  as  soon 
as  they  retired  the  company  hastened  to  make  repairs.  The  road 
did  not  default.  A  portion  of  the  track  yielded  a  revenue  from  first 
to  last,  and  presumably  the  Government  paid  generously  for  the 
transportation  of  its  troops. 

It  was  after  the  Civil  War  that  the  real  history  of  the  road  began. 
The  key-note  was  competition ;  —  competition  of  the  fiercest  sort 
between  parallel  lines  from  Chicago  to  the  seaboard,  intensified  by 
the  rivalry  of  the  great  seaboard  cities,  and  involving  traffic  in  both 
directions.  The  decade  1850-60  had  seen  the  extension  of  Eastern 
roads  to  Western  connections.  In  1851  the  Erie  had  reached  Lake 
Erie;  in  1853  the  New  York  Central  and  Lake  Shore,  and  in  1855 
the  Pennsylvania  and  Fort  Wayne  had  opened  continuous  routes 
from  the  Atlantic  to  Chicago.  In  1857  the  Baltimore  &  Ohio  had 
obtained  connection  with  Cincinnati  and  St.  Louis;  and  in  1858 
the  Grand  Trunk  had  arrived  at  Sarnia  on  its  way  from  Portland 
to  Chicago.  After  the  Civil  War  there  was  both  consolidation  and 
extension.  T^  New  York  Central  was  united  with  the  Hudson 
River,  and  the  Pennsylvania  leased  the  Pittsburgh,  Fort  Wayne 
&  Chicago  in  1869.  The  Baltimore  &  Ohio  reached  Chicago  in 
1874,  and  the  lines  which  in  April,  1880,  were  consolidated  into  the 
Chicago  &  Grand  Trunk  were  completed  between  Port  Huron  and 
Chicago  in  February  of  that  year.  The  completion  of  these  through 
routes  opened  the  way  for  very  bitter  competition.  Five  independent 
lines  struggled  for  Chicago  business,  and  all  of  them  were  prepared 
to  cut  rates  deeply  in  order  to  test  their  rivals'  strength.  In  par- 
ticular the  Baltimore  &  Ohio  was  aggressive.  "At  the  time  of  its 
[Chicago  branch]  opening,"  said  Mr.  Blanchard  before  the  Hepburn 

1  35th  Annual  Report,  1861. 


BALTIMORE  &  OHIO  3 

Committee,  "it  was  heralded  all  over  the  Northwest  as  a  'Re- 
lief for  the  Farmer,'  'the  Grangers'  Friend,'  and  all  other  sorts  of 
headlines  were  put  into  the  Chicago  and  Northwestern  papers; 
and  President  Garrett's  public  utterances,  and  those  to  his  Board, 
were  filled  with  enough  statements  to  show  what  he  intended  to  do. 
...  I  heard  him  [say]  that  upon  the  completion  of  his  lines,  like 
another  Samson,  he  could  pull  down  the  temple  of  rates  upon  the 
heads  of  these  other  trunk  lines."  l 

Under  these  circumstances  a  dispute  between  the  Baltimore  & 
Ohio  and  the  Pennsylvania  in  1874  over  the  former's  connection 
with  New  York  had  far-reaching  consequences.2  The  Pennsyl- 
vania refused  to  carry  Baltimore  &  Ohio  cars  over  its  line  north 
from  Philadelphia,  and  as  a  retaliatory  measure  the  Baltimore  & 
Ohio  reduced  passenger  fares  from  Washington  and  Baltimore  to 
Western  points  from  25  to  40  per  cent.3  The  reduction  in  rates  thus 
begun  inaugurated  the  first  of  the  great  railroad  wars.  The  cuts 
soon  extended  to  east-bound  passengers  and  to  freight,  and  forced 
corresponding  cuts  on  the  Pennsylvania,  the  Lake  Shore  &  Michi- 
gan Southern,  the  Michigan  Central,  the  New  York  Central,  and 
the  Erie.  Rates  on  fourth  class  and  grain  from  Chicago  to  New 
York,  which  had  been  60  cents  per  100  pounds  hi  December,  1873, 
and  40  cents  in  December,  1874,  fell  to  30  cents  in  March,  1875. 
Rates  on  special,  or  sixth  class,4  went  as  low  as  12  cents  from  Balti- 

1  Testimony  of  Mr.  Blanchard,  Hepburn  Committee  Report,  p.  3171.    See  also 
Chron.  20:547,  1875. 

2  The  Baltimore  &  Ohio  had  no  line  to  New  York.  The  Pennsylvania  had  had 
one  since  1873,  and  over  it  Mr.  Garrett  was  forced  to  send  all  his  t"  ,-w  York  business. 
Disputes  arose  over  the  proper  pro-rating  of  charges.  President  Garrett  alleged  that 
the  terminal  charge  of  four  cents  per  100  pounds  which  the  Pennsylvania  Company 
imposed  on  freight  coming  to  or  going  from  New  York  was  exorbitant,  and  that  he 
was  paying  for  100  miles  of  transportation  when  the  real  distance  was  only  90.  Pre- 
sident Scott  replied  that  the  rates  for  terminal  services  in  New  York  were  not  suf- 
ficient to  cover  the  cost  of  doing  the  business,  and  that  the  Pennsylvania's  New  York 
and  Philadelphia  line  was  open  to  the  Baltimore  &  Ohio  on  the  same  terms  as  to 
all  others.   R.  R.  Gaz.  7:71-2,  1875. 

3  R.  R.  Gaz.  6:8,  1874.  The  outcome  was  an  agreement  whereby  the  Baltimore  & 
Ohio  restored  rates  and  fares,  and  the  Pennsylvania  agreed  to  haul  two  of  the  former's 
trains  daily  each  way  between  West  Philadelphia  and  Jersey  City,  to  sell  through 
tickets  West  over  the  Baltimore  &  Ohio,  and  to  give  that  road  all  necessary  facilities 
for  the  handling  of  through  freight. 

•  Sugar,  coffee,  salt,  etc. 


4  RAILROAD  REORGANIZATION 

more  and  Philadelphia  to  Chicago.  Passenger  fares  from  Chicago 
to  Baltimore  and  Washington  were  reduced  from  $19  to  $9,  to 
Philadelphia  from  $19  to  $12,  to  New  York  from  $22  to  $15,  and 
to  Boston  from  $22  to  $15.  The  New  York  Central  and  the  Erie 
quoted  fares  from  New  York  to  Chicago  of  $18  and  to  St.  Louis 
of  $20,  and  the  Baltimore  &  Ohio  replied  by  a  cut  to  $16.25  to 
Chicago.  In  April,  1875,  the  Baltimore  &  Ohio  cut  freight  rates  from 
Cumberland  to  Baltimore  over  50  per  cent  on  the  four  regular  classes, 
and  the  Pennsylvania  at  once  announced  still  greater  reductions.1 

The  effect  of  this  warfare  on  railroad  revenues  was  sufficiently 
serious  to  cause  the  Baltimore  &  Ohio  to  recede  somewhat  from 
its  independent  position  and  to  enter  into  negotiations  with  the 
Pennsylvania ; 2  but  the  terms  of  the  resulting  agreement  proved 
unsatisfactory  to  the  other  trunk  lines,  and  no  general  pacification 
was  obtained.  Late  in  1875  rates  nevertheless  generally  advanced, 
and  in  December  a  general  agreement  was  concluded,  followed  by 
a  general  increase.  This  agreement  was  again  hopelessly  disrupted 
by  the  following  April,  when  cuts  in  east-bound  rates  followed  each 
other  with  rapidity.  The  published  rates  on  grain,  which  had  been 
45  cents  at  the  beginning  of  March,  1876,  fell  to  40  cents  on  March  7, 
35  cents  on  April  13,  22  J  cents  on  April  25,  and  20  cents  on  May  5. 
In  June  rates  on  west-bound  freight  fell  to  25  cents  first  class  to 
Chicago,  and  16  cents  fourth  and  fifth  class,  actual  rates  going 

1  The  traffic  between  Cumberland  and  Baltimore  was  mostly  coal.  In  an  interview 
the  last  of  May  or  first  of  June,  1875,  President  Garrett  said  that  as  soon  as  the  right 
was  conceded  to  his  road  to  enter  New  York  over  the  Pennsylvania  Railroad  as  he  had 
been  doing  for  thirty  years,  and  to  make  such  rates  from  Baltimore  and  Chicago  as 
he  chose,  he  was  ready  for  peace  and  not  sooner.  .  .  .  The  Saratoga  combination, 
which  had  been  gotten  up  to  ruin  the  Baltimore  &  Ohio  Railroad,  had  only  served  to 
establish  the  road  and  give  it  a  standing  in  the  West.  ...  It  had  been  and  was  now 
his  firm  object  to  maintain  the  freight  rate  on  fourth  class,  the  principal  freight  shipped 
from  the  West,  at  35  cents  per  100.  This  was  a  reasonable  rate  and  gave  his  company 
a  fair  profit.   The  other  lines  had  to  submit  to  this  rate  or  there  could  be  no  peace. 
R.  R.  Gaz.  7:237,  1875. 

2  R.R.  Gaz.  7:261,1875;  Ibid.  7:270,  1875;  Ibid.  7:289,  1875;  Chron.   20:593, 
1875.   The  compact  was  to  last  for  ten  years,  the  companies  to  agree  upon  and  to 
maintain  moderate  rates  between  all  competing  points.  Each  board  of  directors  was 
to  appoint  a  special  committee  to  which  was  to  be  referred  all  differences  which  might 
arise.   The  Pennsylvania  opened  its  lines  to  the  Baltimore  &  Ohio  between  Phil- 
adelphia and  New  York  on  the  same  terms  that  it  gave  other  connecting  roads  at 
Philadelphia. 


BALTIMORE  &  OHIO  5 

much  lower;   and  it  was  possible  to   travel   from  New  York  to 
Chicago  first  class  for  $13.* 

Warfare  between  railroads  became  intensified  by  the  competi- 
tion between  the  cities  which  the  railroads  served,  and  by  1876  the 
question  of  relative  rates  to  New  York,  Philadelphia,  and  Baltimore 
had  grown  to  be  of  primary  importance.2  By  an  agreement  in  1869 
Baltimore  had  been  given  a  differential  on  east-bound  freight  of 
10  cents  per  100  pounds,  which  had  been  reduced  to  5  cents  on 
grain  hi  1870.  On  west-bound  freight  Baltimore  had  enjoyed  a 
differential  in  1875  which  had  ranged  from  10  cents  on  first  class 
to  5  cents  on  special  class  freight,  and  Philadelphia  one  which  had 
been  2  cents  less  except  on  first  class,  where  the  Philadelphia  differ- 
ential had  been  3  cents  less  than  that  to  Baltimore.  A  temporary 
agreement  of  March,  1876,  had  replaced  these  allowances  by  dif- 
ferentials of  13  per  cent  hi  favor  of  Baltimore  and  10  per  cent  in 
favor  of  Philadelphia  as  against  New  York.  This  relation  was 
fought  over  in  the  rate  war  of  1876.  In  December  of  that  year  an- 
other agreement  was  reached  on  the  basis  of  equal  rates  from  Western 
points  to  Europe  on  export  traffic  via  all  four  competing  seaboard 
cities,  and  reduced  percentage  differentials  on  local  traffic  to  those 
cities ;  but  this  proved  temporary,  the  subsequent  advances  in  rates 
were  not  general,  and  final  agreement  was  not  secured  until  April, 
1877.  The  contract  then  executed  was  in  the  nature  of  a  compro- 
mise. The  differential  to  Baltimore  was  reduced  from  13  per  cent 
to  3  cents,  and  from  Philadelphia  from  10  per  cent  to  2  cents,  to 
apply  equally  to  local  and  to  export  traffic.  Rates  to  Boston  were 
at  no  time  to  be  less  than  those  to  New  York.  Differentials  on  west- 
bound traffic  were  to  be  the  same  as  those  on  east-bound  on  third 
class,  fourth  class,  and  special  freight,  and  on  first  and  second 
classes  to  be  8  cents  less  per  hundred  from  Baltimore  and  6  cents 
less  from  Philadelphia  than  from  New  York.3 

1  See  Interstate  Commerce  Commission,  Railways  in  the  United  States  in  1902, 
part  2,  entitled,  "  A  Forty-year  Review  of  Changes  in  Freight  Tariff,"  p.  79. 

2  For  an  account  of  the  differentials  at  different  times  see  the  argument  of  counsel 
and  the  opinion  of  the  Interstate  Commerce  Commission, "  In  the  Matter  of  Differen- 
tial Rates  to  and  from  North  Atlantic  Ports,"  April  27,  1905,  in  Elkins  Committee 
Report,  vol.  5,  Appendix  E.  See  also  7  I.  C.  C.  Rep.  612. 

3  Albert  Fink,  Report  on  Adjustment  of  Railway  Rates;  also  Testimony  of  Mr. 
Blanchard,  Hepburn  Committee  Report,  pp.  3171  ff. 


6  RAILROAD  REORGANIZATION 

The  years  following  the  agreement  of  1877  were  marked  by  low 
and  fluctuating  rates,  extensive  cutting  under  the  published  schedules, 
and  frequent  attempts  at  pooling  and  at  apportionment  of  traffic. 
At  a  meeting  at  Chicago  on  December  19,  1878,  tariff  rates  were 
agreed  upon  by  all  lines,  but  the  existence  of  time  contracts  de- 
pressed receipts  for  months  thereafter.  Another  meeting  on  May  8 
was  followed  by  sharp  competition.  In  June  an  agreement  to  raise 
rates  was  made,  but  proved  unsatisfactory  owing  to  long  time 
contracts.  "During  the  period  between  December  18,  1878,  and 
July  5,  1879,"  said  Mr.  King  in  a  letter  to  the  Trunk-Line  Arbi- 
trators on  July  17,  1879,  uthe  Baltimore  &  Ohio  Company  has 
practically  been  out  of  the  market,  on  account  of  the  low  rates  by 
the  Northern  lines.  It  has  not  secured  enough  east-bound  freight 
to  give  return  loads  for  the  small  west-bound  traffic  sent  over  its 
lines  to  that  city,  and  has  repeatedly  moved  its  cars  empty  from 
Chicago  to  other  points  on  its  lines  east  of  that  city."  * 

Early  in  1881  the  cutting  of  rates  became  sufficiently  important 
to  force  official  recognition  by  the  chairman  of  the  trunk-line  pool.2 
By  June  17  quoted  rates  on  grain  were  15  cents  per  100  pounds 
from  Chicago  to  New  York,  and  a  railroad  war  was  in  full  swing.3 
By  October  the  grain  rate  had  been  reduced  from  15  cents  to  12^ 
cents;  by  August  passenger  fares  were  $7  from  New  York  to  Chi- 
cago, and  $16  from  Chicago  to  New  York,  and  there  was  quoted 
besides  a  $5  Boston  to  Chicago  rate  over  the  Grand  Trunk.  The  rad- 
ical nature  of  these  cuts  can  be  appreciated  from  Mr.  Albert  Fink's 

1  "Additional  Arguments  on  the  Division  of  [Dead]  Freight  from  Cincinnati  of 
the  Atlantic  &  Great  Western,"  etc.,  N.  Y.  1879,  p.  5.  Speaking  from  the  standpoint 
of  an  impartial  observer,  Mr.  Fink  declared  that  $1,840,494  had  been  lost  between 
December  19,  1878,  and  May  i,  1879,  through  the  failure  of  the  Michigan  Central, 
Lake  Shore,  Pennsylvania,  and  Baltimore  &  Ohio  and  their  connections  to  observe 
their  published  tariffs.    Chron.  28:  578,  1879. 

2  By  agreement  of  March  n,  1881,  the  chairman  of  the  Joint  Executive  Com- 
mittee, Mr.  Fink,  was  given  authority  to  proclaim  a  general  reduction  in  published 
rates  when  it  should  be  shown  that  any  pool  line  had  been  accepting  traffic  at  less 
than  the  regular  rate.    This  authority  he  exercised  in  April.    Rates  were  restored 
almost  immediately  by  special  action  of  the  Joint  Executive  Committee,  only  to  be 
reduced  again  in  June  for  similar  reasons. 

3  The  actual  outbreak  of  the  war  was  due  to  the  conviction  of  the  New  York 
Central  that  traffic  was   being  diverted  to  other  roads  by  secret  departures  from 
the  published  tariff.   R.  R.  Gaz.  13:  347,  1881. 


BALTIMORE  &  OHIO  7 

testimony  before  the  Hepburn  and  Cullom  Committees.  Fifteen 
cents,  said  he  in  1879,  just  covered  the  actual  cost  of  hauling  the 
grain ; l  twenty  cents,  he  asserted  in  1885,  was  the  bare  cost  of  move- 
ment, including  the  general  expenses,  but  without  any  profit  to 
the  road.2  Grain  was  therefore  not  repaying  the  specific  cost  of 
hauling,  and  passengers  were  obviously  in  similar  case.  Temporary 
relief  occurred  through  the  large  increase  in  business  which  took 
place  at  the  end  of  1881.  In  October  the  Pennsylvania  and  the 
Baltimore  &  Ohio  advanced  east-bound  rates  because  of  the 
abundance  of  traffic  offering,  and  the  New  York  Central,  Erie, 
and  Grand  Trunk  followed  to  a  less  degree.  In  November  further 
advances  occurred,  though  west-bound  rates  remained  low  ;  but 
throughout  December  and  January  rates  were  low  and  fluctuating,3 
and  negotiations  were  carried  on  for  the  settlement  of  the  differ- 
ential question  which  underlay  the  trouble.  None  of  the  combatants 
were  open  to  conviction ;  the  only  outlet  was  therefore  arbitration, 
and  this  was  reluctantly  resorted  to.4  In  January,  1882,  the  roads 
divided  the  through  trunk-line  business,  agreed  to  raise  rates,  and 
left  the  subject  of  differentials  to  be  investigated  by  Messrs.  Thur- 
man,  Washburn,  and  Cooley.5 

This  solution  settled  nothing.  During  the  following  three  years 
constant  disputes  arose  over  the  proper  division  of  traffic,6  and  in 
1884  the  old  struggle  was  resumed  with  unabated  vigor.  Rates  on 
grain  to  the  seaboard  fell  from  30  cents  to  20  cents  on  March  14 
of  that  year,  and  to  15  cents  on  March  21 ;  remaining  low  and 

1  Hepburn  Committee  Report,  vol.  3,  p.  558. 

2  Cullom  Committee  Report,  vol.  2,  p.  98. 

3  In  January  the  Pennsylvania  announced  that  it  would  take  provisions  from 
Chicago  to  Xe\v  York  for  ten  cents  per  hundred  pounds.  R.  R.  Gaz.  14:  28,  1882. 

4  See  Albert  Fink,  Report  upon  the  Adjustment  of  Railroad  Transportation  Rates 
to  the  Seaboard,  1882;  also,  Letter  to  a  New  York  Merchant,  by  the  same,  Hepburn 
Committee  Report,  vol.  2,  Exhibits,  pp.  106-119. 

5  For  agreement  see  Chron.  34:  116,  1882.    The  Commissioners'  functions  were 
purely  advisory.   They  reported  in  July  that  "no  evidence  has  been  offered  before 
us  that  the  existing  differentials  are  unjust,  or  that  they  operate  to  the  prejudice 
of  either  of  the  Atlantic  seaboard  cities."  Senate  Committee  on  Interstate  Commerce 
Report  (Elkins  Committee),  1905,  vol.  2,  pp.  1243  ff. 

9  The  question  was  passed  upon  by  C.  F.  Adams  as  arbitrator  in  November,  1882 
(Chron.  35:  603,  1882),  and  by  the  Trunk-Line  Board  of  Arbitration  in  January,  1884 
(Chron.  38:  31,  1884). 


8  RAILROAD  REORGANIZATION 

fluctuating  through  the  year.1  Immigrant  business  from  New  York 
to  Chicago  was  handled  by  the  Pennsylvania  at  one  dollar  a  head. 
By  February,  1885,  rates  for  traffic  in  both  directions  were  com- 
pletely demoralized.  Nominal  east-bound  charges  on  grain  were 
25  cents,  or  a  10  cent  advance  since  the  preceding  March,  but  actual 
rates  were  as  low  as  8  and  10  cents.  Meanwhile  published  rates  on 
west-bound  freight  were  a  third  less  than  the  standard  tariff,  and 
passenger  rates  in  both  directions  were,  roughly,  one-half  the  regular 
charges.  The  following  month  still  further  reductions  occurred. 
The  warfare  was  finally  terminated  by  an  agreement  to  maintain 
rates  late  in  i885,2  followed  by  an  elaborate  pooling  agreement  be- 
tween the  competing  lines.3 

From  1875  to  1885  the  trunk  lines  to  the  Atlantic  ports  were  thus 
engaged  in  active  competition.  What  was  the  effect  of  this  upon 
the  Baltimore  &  Ohio?  This  road  was  highly  prosperous  in  1875. 
Dividends  of  6  per  cent  and  10  per  cent  were  being  paid.  The  cap- 
italization was  small  and  the  management  conservative.  During 
the  ten  years  following  1875  the  rate  of  dividend  was  not  materially 
decreased.  In  1876  10  per  cent  was  paid.  In  1877  the  old  8  per  cent 
rate  was  restored,  and  the  following  year  the  distribution  was  made 
in  stock  instead  of  in  cash.  After  the  agreement  of  1878  one-half 
year's  dividend  was  paid  in  cash ;  and  in  1879  9  per  cent  cash,  and 
in  1880  10  per  cent  cash  was  declared,  this  rate  enduring  until 
1886.  But  although  dividends  were  maintained,  the  effect  of  the 
railroad  wars  appeared  in  the  slowness  with  which  net  earnings 
increased.  A  comparison  of  the  net  returns  of  1884  with  those  of 
1874  reveals  a  gain  of  40  per  cent,  on  a  mileage  27  per  cent  greater ; 
but  the  figures  for  1885  show  an  increase  of  less  than  2  per  cent 
over  those  for  1874,  while  the  totals  for  1884  were  not  again  equalled 
until  1900.  Meanwhile  more  bonds  had  been  issued,  and  the  per- 
centage of  fixed  charges  to  net  earnings  had  increased  from  16  in 
1874  to  63  in  1884.  In  other  words,  money  was  borrowed  to  put 
into  the  road  which  did  little  more  than  keep  the  net  earnings  from 

1  The  attempt  of  the  Pennsylvania  to  cut  off  the  New  York  connection  of  the 
Baltimore    &  Ohio  caused  especial  bitterness  between  those  roads.    See  Chron. 
39:420,  1884. 

2  Chron.  41:393.  1885. 

1  Cullom  Committee  Report,  vol.  i,  Appendix,  pp.  237,  and  240  ff. 


BALTIMORE  &  OHIO  9 

declining.  In  that  same  time  the  stock  increased  $2,900,000,  and 
according  to  the  profit  and  loss  account  $15,559,636  were  put  into 
the  property,  making  a  total  of  $55,743,092  (of  this  $37,197,696 
were  bonds);  the  only  result  of  which  was  the  building  of  313  miles 
of  line,  and  the  securing  of  an  increase  in  net  earnings  for  1884, 
which  was  swept  away  the  following  year. 

In  1884  the  elder  Garrett  died,  and  his  son  Robert  was  elected 
to  succeed  him.  The  old  policy  of  independence  and  competition 
was  continued,  the  objective  point  being  now  an  entrance  into 
New  York.  "  When  in  1885  the  other  trunk  lines  harmonized 
their  differences,  ..."  said  the  Chronicle,  "the  Baltimore  & 
Ohio  .  .  .  pursued  its  policy  of  aggression.  .  .  .  The  road  must 
reach  Philadelphia  .  .  .  nay,  must  push  ...  on  to  New  York.  .  .  . 
Instead  of  seeking  to  avoid  rivalry,  its  every  effort  seemed  to  en- 
courage it.  Rates  were  reduced,  concessions  made  to  shippers  and 
travellers,  the  one  idea  apparently  being  to  get  traffic  no  matter  what 
the  cost."  l  The  necessity  of  a  secure  New  York  connection  had 
been  impressed  upon  the  company  in  the  course  of  the  rate  wars. 
The  first  step  was  to  be  actual  construction  to  Philadelphia,  the 
second,  construction  or  traffic  agreements  from  Philadelphia  to 
New  York.  Bonds  were  issued  in  April,  1883,  for  construction  of 
a  so-called  Philadelphia  branch  from  Baltimore  to  the  northern 
boundary  of  Cecil  County,  Maryland,2  there  to  connect  with  the 
Baltimore  &  Philadelphia  Railroad,  which  was  being  built  through 
Delaware  and  Pennsylvania  to  Philadelphia.  Entrance  into  Phil- 
adelphia was  secured  over  the  Schuylkill  River  East  Side  Railway, 
a  corporation  organized  under  the  laws  of  Pennsylvania  and 
doing  business  in  the  city  only.8  The  distance  was  approximately 
ninety-nine  miles ;  the  cost  was  later  asserted  to  have  been  $20,000,- 
ooo.  Beyond  Philadelphia  the  Baltimore  &  Ohio  relied  on  an 
agreement  with  the  Philadelphia  &  Reading  for  trackage  to  Bound 
Brook,  New  Jersey,4  and  on  a  traffic  contract  with  the  Central  of 
New  Jersey  for  its  line  from  Bound  Brook  to  Elizabeth.5  Terminals 

1  Chron.  45:  692,  1887. 

2  The  amount  of  issue  was  £2,400,000  ($11,678,400)  at  4^  per  cent,  maturing 
April  i,  1933,  and  placed  through  Brown,  Shipley  &  Co.  of  London.  Chron.  36:426, 
1883. 

3  Chron.  40:  453,  1885. 

4  Chron.  41:  555,  1885.  *  Chron.  43:  190,  1886. 


10  RAILROAD  REORGANIZATION 

on  Staten  Island  were  secured  by  purchase  of  a  controlling  interest  in 
the  Staten  Island  Rapid  Transit  Company, l  and  connection  between 
Elizabeth  and  the  Island  was  obtained  by  new  construction.  The 
strength  of  this  route  was  in  its  directness  and  in  its  independence 
of  trunk-line  control ;  its  weakness  was  in  its  excessive  cost  between 
Baltimore  and  Philadelphia,  and  in  its  reliance  upon  traffic  contracts 
north  of  the  latter  city.  A  proposition  was  advanced  to  unite  the 
Baltimore  &  Ohio,  the  Philadelphia  &  Reading,  and  the  Central 
of  New  Jersey  with  the  Richmond  Terminal  System.  This,  however, 
fell  through,2  and  the  possibility  still  existed  that  the  Baltimore  & 
Ohio  might  some  day  construct  a  line  of  its  own  from  Philadelphia 
to  New  York. 

Pending  the  completion  of  the  preceding  arrangements  rate 
conditions  remained  naturally  unsatisfactory.  The  Pennsylvania 
objected  to  the  paralleling  of  its  Philadelphia- New  York  branch,  and 
refused  to  allow  temporary  use  of  that  line  by  the  Baltimore  &  Ohio 
while  the  latter's  independent  connections  were  being  established.3 
Freight  rates  were  slowly  and  painfully  raised  after  the  conflict  of 
1884-5,  and  did  not  regain  a  high  level.  In  1886  the  Baltimore  & 
Ohio  was  forced  to  reduce  its  dividends  from  10  to  8  per  cent.  The 
following  year  it  cut  to  4  per  cent,  and  in  1888  no  dividend  at  all 
was  declared.  The  surplus  on  the  year's  operations,  which  had  not 
since  1878  fallen  below  $1,000,000,  dropped  to  $110,819  in  1885, 
and  to  $36,259  in  1886.  As  dividends  decreased,  the  funded  debt 
increased,4  the  percentage  of  fixed  charges  to  net  income  rose  from 
63  to  89,  and  the  floating  debt  attained  the  portentous  amount  of 

1  The  Staten  Island  Rapid  Transit  possessed  an  extensive  water  front  on  Staten 
Island,  besides  franchises  for  two  ferries  from  Staten  Island  to  the  Battery,  New 
York  City.   Some  trouble  was  experienced  in  securing  permission  to  bridge  the  Kill 
von  Kull  between  Staten  Island  and  the  New  Jersey  mainland.   Congress  passed  an 
act  permitting  construction,  New  Jersey  protested,  and  the  courts  upheld  the  author- 
ity of  Congress.   Stockton  v.  Baltimore  &  New  York  Railroad  Co.,  32  Fed.  Rep.  9. 

2  R.  R.  Gaz.  19:170,  1887;  Ibid.  19:490,  1887.     For  an  account  of  the  Rich- 
mond &  West  Point  Terminal  Railway  &  Warehouse  Company  see  the  chapter  on 
the  Southern  Railway. 

3  R.  R.  Gaz.   18:49,  l886-   Interview  with  Mr.  Albert  Fink.   A  passenger  rate 
war  between  the  Pennsylvania  and  the  Baltimore  &  Ohio  took  place  early  in  1886, 
and  resulted  in  the  indirect  cutting  by  the  former  of  the  pool  rate  which  it  had  agreed 
to  maintain.    Chron.  42 :  73,  1886. 

*  From  $34,713,696  in  1884  to  $56,868,201  in  1887. 


BALTIMORE  &  OHIO  II 

$11,148,007.  The  only  item  which  did  not  grow  was  net  earnings. 
There  was  nothing  occult  in  the  situation.  Every  one  was  well  aware 
that  the  competition  to  which  the  Baltimore  &  Ohio  had  been  sub- 
jected had  been  severe,  and  that  the  cost  of  its  New  York  extension 
had  been  large.  In  1887  the  bonds  outstanding  were  $56,868,201, 
the  stock  $19,792,566,  and  the  accumulated  surplus  $48,083,720, 
or  a  total  of  $124,744,487.  This  stood  for  the  sums  invested  in  the 
property.  Net  income  on  the  other  hand  was  $4,994,721;  so  that 
on  an  investment  of  over  $100,000,000  but  4  per  cent  was  being 
obtained  to  cover  interest,  improvements,  and  whatever  dividend 
might  be  declared. 

That  no  general  apprehension  was  felt  by  investors  before  1887 
was  due  to  the  great  prestige  which  the  Baltimore  &  Ohio  enjoyed. 
The  long  series  of  dividends  counted  heavily  in  favor  of  the  road. 
The  enormous  accumulated  surplus,  said  to  have  been  invested  in 
valuable  improvements  and  extensions ;  l  the  enterprise  of  the  com- 
pany in  making  extensions;  the  large  volume  of  business;  and  the 
confident  statements  of  the  president,  all  conspired  to  prevent  a  too 
keen  analysis  of  the  business  returns.2  Relief  of  two  sorts  was 
nevertheless  required.  In  the  first  place  the  floating  debt  had  grown 
so  large  that  some  means  of  paying  it  off  was  necessary ;  in  the 
second  place  the  road  needed  a  sufficient  reduction  in  fixed  charges 
to  restore  some  of  the  margin  of  non-mortgaged  earnings  which  had 
been  so  great  a  safeguard  in  the  early  days.  Only  the  first  of  these 
requirements  was  met.  Cash  the  road  had  to  have;  the  existing 
fixed  charges,  it  was  thought,  it  could  endure  if  only  some  abatement 
of  the  intensity  of  trunk-line  competition  could  be  obtained. 

The  method  chosen  for  raising  cash  was  the  sale  of  bonds.  In 
September,  1887,  J.  P.  Morgan  &  Co.  announced  that  a  prelimin- 
ary contract  had  been  entered  into  between  the  Baltimore  &  Ohio 
Railroad  Company  and  J.  S.  Morgan  &  Co.,  Baring  Bros.  &  Co., 
and  Brown,  Shipley  &  Co.,  of  London,  and  their  allied  houses  in 
America,  for  the  negotiation  of  $5,000,000  Baltimore  &  Ohio  Con- 

1  Such  as  connecting  lines,  iron  bridges  over  the  Ohio  River,  elevators,  wharves, 
terminal  facilities,  etc. 

2  The  lowest  average  price  of  the  common  stock  before  announcement  of  the 
measures  taken  for  relief  was  160,  from  which  point  the  quotations  rapidly  dropped 
to  125,  and  on  January  5,  1889,  to  85. 


12  RAILROAD  REORGANIZATION 

solidated  53  and  of  $5,000,000  preferred  stock,  for  the  purpose  of 
paying  off  the  entire  floating  debt,  and  of  placing  the  company  upon 
a  sound  financial  basis.1  The  consolidated  bonds  were  to  be  part 
of  an  authorized  issue  of  $29,600,000,  of  which  $21,423,000  were  to 
be  reserved  to  retire  the  main  stem  mortgage  indebtedness  when  it 
should  fall  due,  and  $8,177,112  were  to  be  exchanged  for  securities 
in  the  company's  sinking  fund,  the  freed  securities  to  be  used  to 
pay  the  floating  debt  in  part.  In  case  this  exchange  should  not  be 
made,  $7,500,000  of  the  issue  might  be  sold  direct,  and  the  syndi- 
cate before  mentioned  agreed  to  take  $5,000,000  of  this  amount 
and  to  place  $5,000,000  in  preferred  stock  on  condition : 

(a)  That  the  statements  of  the  company  should  be  verified; 

(b)  That  the  management  of  the  company  should  be  placed  in 
competent  hands,  satisfactory  to  the  syndicate; 

(c)  That  satisfactory  contracts  should  be  made  between  the  Balti- 
more &  Ohio  and  other  roads  for  New  York  business,  which  should 
remove  all  antagonism  between  them  on  the  subject,  and  should 
ensure  the  permanent  working  of  the  first-named  in  entire  harmony 
with  the  other  trunk  lines,  besides  avoiding  the  construction,  or 
the  threat  of  construction,  of  expensive  lines  north  and  east  of 
Philadelphia. 

Annual  payments  to  the  Baltimore  &  Ohio  sinking  funds  were 
to  be  made  in  the  future  in  consols  instead  of  in  cash.2 

The  essence  of  this  arrangement  was  a  funding  of  the  floating 
debt,  plus  agreements  with  other  roads  in  order  to  maintain  earn- 
ings. The  funding  involved,  however,  a  certain  increase  of  charges 
through  the  issue  of  bonds,  while  the  agreements  offered  but  a 
doubtful  chance  of  increased  earnings.  Only  by  an  effective  com- 
munity of  interest  or  of  ownership  among  the  trunk  lines  could  a 
saving  have  been  secured  on  which  the  new  bond  issues  could  safely 
have  relied.  That  this  was  to  take  place  through  the  syndicate, 
that  body  was  emphatic  in  denying.  "The  statement,"  said  Vice- 

1  Chron.  45:  304,  1887;  Ibid.  45:  824,  1887. 

2  About  $5,000,000  of  the  floating  debt  in  March,  1888,  consisted  of  advances  by 
the  syndicate,  for  which  they  held  50,000  shares  of  Western  Union  Telegraph  Company 
stock,  and  15,000  shares  of  United  States  Express  Company  stock,  which  at  current 
prices  about  covered  their  loan.    Statement  of  President  Spencer,  Chron.  46:  344, 
1888. 


BALTIMORE  6s   OHIO  13 

President  Spencer,  "that  the  Baltimore  &  Ohio  Railroad  has 
passed  into  the  hands  of  a  syndicate,  of  which  J.  P.  Morgan  is  the 
head,  is  absolutely  without  foundation.  .  .  .  The  syndicate  has 
the  greatest  interest  now  in  the  growth  of  the  Baltimore  &  Ohio, 
and  to  secure  this  growth  and  progress  absolute  independence  of 
other  corporate  predominance  is  essential,  and  the  road  must  be 
worked  in  the  interest  of  the  states  and  territories  it  reaches."  * 
This  declaration  left  only  informal  agreements  as  a  resort ;  for  pool- 
ing had  been  forbidden  hi  1887.  It  did  more,  it  implied  the  neces- 
sity of  a  maintenance  of  competition,  for  to  work  the  Baltimore  & 
Ohio  hi  the  interest  of  Baltimore  meant  to  work  it  against  the 
interest  of  New  York.  In  principle  the  plan  was  nevertheless 
adopted.  Bondholders  saw  no  necessity  for  a  radical  reorganiza- 
tion, and  were  willing  to  consent  only  to  a  new  issue  of  bonds.  Cer- 
tain modifications  were,  however,  imposed.  The  exchange  of  new 
bonds  for  securities  in  the  sinking  fund  was  abandoned,  and  the 
alternative  of  direct  sale  was  embraced.  It  was  found  impossible 
to  secure  the  consent  of  stockholders  to  an  increase  in  the  preferred 
stock,  three  attempts  to  obtain  the  required  authorization  failing 
in  the  week  ending  January  20,  i888.2  Furthermore,  the  failure 
of  the  stock  issue  led  President  Spencer 3  to  request  that  the  city  of 
Baltimore  extend  for  five  years  at  4  per  cent  a  $5,000,000  loan  to 
the  company,  which  was  to  mature  in  two  years,  and  that  it  return 
the  sinking  fund  of  $2,400,000  which  had  accumulated  in  its  hands 
for  the  eventual  cancellation  of  the  debt.4  It  may  be  added  that  this 
suggestion  was  not  accepted. 

1  Ry.  Age,  12:640,  1887. 

2  "If  it  [the  stock]  is  sold,"  said  a  statement  in  the  New  York  Tribune,  purporting 
to  represent  the  views  of  Senator  Gorman,  a  large  stockholder,  "  it  will  place  the 
control  of  the  road  practically  in  the  hands  of  the  syndicate.  ...  It  is  clearly 
preferable  to  keep  the  control  of  the  stock  here  [Baltimore],  as  the  road  is  a  city  and 
state  institution  of  the  first  importance  to  our  business  interests."  Ry.  Age,  13:44. 
1888.   Another  objection  was  that  an  issue  of  additional  preferred  stock  would  post- 
pone indefinitely  dividends  upon  the  common. 

3  Mr.  Spencer  had  succeeded  Robert  Garrett  in  December,  1887. 

4  Chron.  46:319,  1888.    In  connection  with  this  proposition  President  Spencer 
made  the  following  statement:  Of  the  $11,148,007  floating  debt,  December,  1887, 
$7,769,314  consisted  of  loans  and  bills  payable.   This  is  now  reduced  to  $6,446,173. 
There  will  probably  be  added  to  this  $1,400,000  for  equipment,  already  either  under 
contract  or  to  be  constructed  in  the  company's  shops.   In  addition  there  should  be, 
in  the  near  future,  not  less  than  $2,000,000  additional  put  into  this  property  for  the 


14  RAILROAD  REORGANIZATION 

While  awaiting  final  settlement  of  the  syndicate  scheme  the 
Baltimore  &  Ohio  obtained  some  cash  from  the  disposal  of  all  its 
free  resources  ;  that  is,  from  the  telegraph,  express,  and  sleeping-car 
businesses  which  it  had  conducted  since  early  in  the  administration 
of  John  Garrett.  In  August,  1887,  it  sold  its  express  business  to 
the  United  States  Express  Company  for  a  period  of  thirty  years,  in 
return  for  $1,500,000  of  the  capital  stock  of  the  express  company 
plus  a  certain  percentage  of  the  annual  earnings  of  the  express  lines 
handed  over.1  In  October  of  the  same  year  its  telegraph  business 
was  turned  over  to  the  Western  Union  Telegraph  Company  in 
return  for  $5,000,000  of  the  Western  Union  stock,  and  an  annual 
payment  of  $60,000  in  cash.2  Finally,  in  June,  1888,  its  sleeping-car 
equipment  and  franchises  were  transferred  to  the  Pullman  Company 
for  a  period  of  twenty-five  years  at  a  reported  price  of  $i,25o,ooo.3 
The  company  agreed  to  furnish  all  the  sleeping  and  parlor  cars 
required.  This  brought  the  incidental  advantage  of  ending  long- 
continued  suits  over  patents.  The  terms  of  sale  to  the  telegraph  and 
express  companies  brought  hi  no  ready  money,  but  the  securities 
obtained  were  readily  salable,  and  being  independent  for  their  value 
of  the  commercial  success  of  the  Baltimore  &  Ohio  were  available 
for  times  of  difficulty.  It  was  this  policy  which  offset  the  refusal 
of  the  city  of  Baltimore  to  return  the  sinking  fund  to  the  company, 
and  which  by  March,  1888,  rendered  the  road  even  to  some  extent 
independent  of  the  syndicate.  At  that  date  a  modification  of  the 
syndicate  agreement  took  place.  The  bankers  gave  up  all  claim  to 
the  $5,000,000  of  stock  so  long  under  discussion,  and  took  instead 
the  balance  ($2,500,000)  of  the  $7,500,000  consolidated  mortgage 
bonds  which  the  company  was  authorized  to  sell.  "The  syndicate 
acted,"  said  the  Baltimore  Sun,  "in  an  entirely  friendly  spirit,  and, 

purpose  of  improvement.  The  total  requirements  are  thus  $10,000,000.  Of  this 
$5,000,000  will  be  disposed  of  by  assets  in  the  hands  of  the  syndicate  as  collateral,  or 
in  the  hands  of  the  company.  Of  the  remaining  $5,000,000,  $1,500,000  is  floating 
debt.  This  will  be  more  than  provided  for  by  the  $2,500,000  of  consolidated  bonds 
remaining  in  the  hands  of  the  company  for  its  future  use  after  the  sale  of  the  $5,000,000 
to  the  syndicate.  The  remaining  $3,500,000  needed  fo/  equipment  and  improve- 
ments it  is  the  desire  of  the  company  to  provide  for  by  that  portion  of  the  $2,500,000 
not  required  for  the  floating  debt,  and  by  the  $2,500,000  in  the  sinking-fund  loan  of 
1890.  Chron.  46:344. 

1  Ry.  Rev.  28:192,  1888.  3  Ry.  Age,  12:728,  1887. 

3  R.  R.  Gaz.  20:417,  1888. 


BALTIMORE  &>  OHIO  15 

with  a  desire  to  continue  its  financial  relations  with  the  company, 
took  the  remaining  $2,500,000  ...  at  a  better  price  than  was  paid 
for  the  $5,000,000."  1 

With  temporary  financial  requirements  provided  for,  President 
Spencer  was  enabled  to  achieve  some  much-needed  reforms.  At 
a  meeting  of  the  directors  on  March  14  a  complete  reorganization 
of  the  service  was  authorized,  with  changes  and  transfers  affecting 
employees  from  the  first  vice-president  down.  Later  a  committee 
of  mechanical  experts  was  organized  "to  examine  thoroughly  all 
the  shops,  shop  tools,  etc.,  of  the  entire  Baltimore  &  Ohio  system, 
and  to  report  on  all  the  improvements  needed."  2  The  form  of  the 
annual  report  was  improved.  The  much-quoted  surplus,  which  had 
proved  such  an  unreliable  support,  was  cut  in  two  by  the  writing 
off  of  bad  investments,  the  marking  down  of  the  price  of  securities, 
and  the  like;  and,  finally,  a  committee  was  appointed  to  make  a 
general  examination  of  the  financial  as  well  as  the  physical  con- 
dition of  affairs.3  "  Great  anxiety,"  said  a  resolution  of  the  direct- 
ors, "exists  in  the  public  mind  as  to  the  financial  condition  and 
the  value  and  earning  capacity  of  the  road  and  property  .  .  .  [and] 
it  is  due  to  all  interests  that  a  full,  frank,  and  complete  statement  of 
its  affairs  should  be  made  public."  So  far  as  lay  in  his  power  Pre- 
sident Spencer,  and  through  him  the  syndicate,  tried  to  secure  a  real 
and  permanent  improvement  in  the  condition  of  the  road,  and  to 
gain,  through  increased  efficiency  in  operation,  the  margin  which 
the  refusal  to  cut  down  fixed  charges  had  denied.  The  failure 
of  the  attempt  may  be  ascribed  to  the  continuance  of  the  Garrett 
family  in  power.  Any  irregularities  or  mistakes  which  had  taken 
place  in  the  past  reflected  on  the  Garretts,  so  that  it  was  to  their 
interest  to  stifle  investigation.  Moreover,  any  change  in  policy  for  the 
future  implied  a  criticism  of  their  acts  to  which  they  were  reluctant 
to  accede.  In  1888  the  Garrett  holdings  amounted  to  from  50,000 

1  Ry.  Rev.  28: 192,  1888.  The  amiability  of  the  syndicate  was  profitable  to  it.  On 
May  21  the  subscription  books  of  the  $7,500,000  mortgage  were  opened  in  London 
and  New  York,  and  the  whole  issue  was  subscribed  in  London  before  the  inhabitants 
of  the  American  city,  in  spite  of  their  proverbial  alertness,  were  out  of  bed.   In  Septem- 
ber, 1888,  the  Baltimore  &  Ohio  was  reported  as  "having  all  the  funds  needed  for 
the  present."  R.  R.  Gaz.  20:343,  1888. 

2  Ry.  Rev.  28:163,  l888- 

3  Ibid.  28:236,  1888. 


1 6  RAILROAD  REORGANIZATION 

to  60,000  shares  out  of  a  total  of  150,000  shares,  or,  deducting  32,500 
shares  held  by  the  city  of  Baltimore,  which  were  not  entitled  to 
vote,  to  about  one-half  of  a  total  of  117,500  shares.  This  gave 
undisputed  control.  The  effect  was  seen  in  the  annual  election  in 
November.  Of  12  old  members  of  the  board  only  5  were  reflected, 
and  of  the  7  dropped  3  formed  part  of  the  investigating  committee 
engaged  in  securing  "the  full,  frank,  and  complete  statement  of 
the  company's  condition"  promised  at  an  earlier  date.1  The  same 
month  President  Spencer  was  ousted  and  Mr.  Charles  F.  Mayer 
was  elected  in  his  place. 

This  revolution  was  fatal  to  any  radical  reform,  so  that  during 
the  next  seven  years  the  condition  of  the  Baltimore  &  Ohio  im- 
proved but  little.  Net  income  grew,  it  is  true,  up  to  the  panic  year 
of  1893,  but  fell  so  sharply  after  that  that  the  reported  figures  for 
1895  exceeded  those  of  1888  by  but  $1,283,843,  and  even  this  gain 
was  practically  wiped  out  during  the  following  year.  Meanwhile 
fixed  charges  grew  from  $6,550,972  in  1888  to  $6,934,052  in  1895, 
and  to  $7,303,781  in  1896 ;  an  increase  which  transformed  the  profits 
of  the  company  the  following  year  into  a  deficit.  A  comparison  of 
the  balance-sheets  of  1888  and  1895  shows  an  increase  of  $10,207,434 
in  stock,  of  $16,261,000  in  funded  debt,  and  of  $4,554,939  in 
floating  debt.  These  changes  were  offset  mainly  by  increases  hi 
bonds  and  stock  owned,  or  in  the  hands  of  trustees,  by  advances 
to  subsidiary  lines,  and  by  a  reduction  of  $11,080,000  in  bonded 
debt  secured  by  collateral  or  by  mortgage  on  the  main  line.  During 
this  time  dividends  were  nevertheless  steadily  paid  on  the  preferred 
stock,  and,  beginning  in  1891,  upon  the  common  stock  as  well. 
The  liberal  tendencies  of  the  management  were  also  evinced  by 
a  20  per  cent  dividend  upon  the  common  stock,  declared  in  1891 
to  compensate  shareholders  for  expenditures  in  betterments  and 
improvements  of  the  physical  condition  of  the  property.2  It  will  be 

1  Ry.  Rev.  28  :  678,  1888  ;  Ibid.  28:  689,  1888.   The  coincidence  was  so  suggestive 
that  it  was  thought  necessary  to  "credibly  inform"  certain  bankers  that  the  investi- 
gating committee  was  expected  to  continue  its  investigation  and  to  make  a  full  report. 
In  December  the  committee  was  instructed  by  a  directors'  resolution  not  to  report 
till  its  full  statement  was  ready,  and  further  notice  does  not  appear. 

2  Ry.  Age,  16:  882,  1891.  At  the  same  time  the  directors  decided  to  sell  $5,096,600 
additional  common  stock  to  meet  expenditures  which  would  be  necessary  in  con- 
nection with  the  World's  Fair  at  Chicago. 


BALTIMORE  &   OHIO  17 

seen  how  different  this  was  from  the  policy  of  retrenchment  and 
economy  which  had  been  inaugurated  by  President  Spencer,  and 
which  might  fairly  have  been  expected  from  a  corporation  barely 
escaped  from  bankruptcy. 

Traffic  conditions  from  1887  to  1893  were  very  far  from  satis- 
factory. The  difficulties  between  the  Baltimore  &  Ohio  and  the 
Pennsylvania  were  indeed  patched  up,  and  the  opening  of  the 
former's  lines  to  New  York  rendered  it  independent  of  other  trunk- 
line  connections  ;  but  frequent  charges  of  rate  cutting  were  made  in 
1887,  and  a  war  in  dressed-beef  rates  was  inaugurated  by  the  Grand 
Trunk  in  November  of  that  year.  In  1888  rates  were  pretty  much 
demoralized.  Published  rates  on  grain  dropped  from  27^  cents  in 
January  to  20  cents  in  October.  Emigrant  rates  from  New  York 
to  western  points  became  the  subject  of  active  competition ;  and, 
most  important  of  all,  the  dressed-beef  controversy  was  pushed  till 
it  developed  into  a  war  of  the  most  active  kind.  The  trouble  here 
was  started  by  cuts  on  dressed  beef  by  the  Grand  Trunk.  In  May 
other  lines  retaliated  by  cuts  in  live-stock  rates;  by  July  14  pub- 
lished rates  on  cattle  from  Chicago  to  New  York  were  5^  cents  per 
100  pounds,  and  on  dressed  beef  and  hogs  7  cents.  In  November 
the  New  York  Central  extended  the  contest  by  a  general  reduction  in 
west-bound  rates.1  These  struggles,  though  terminated  for  a  time 
by  an  agreement  of  February,  1889,*  seriously  diminished  rail- 
way revenues,  and  prevented  the  rapid  growth  which  the  general 
prosperity  of  the  country  might  have  occasioned.3  In  fact,  the 
Erie  management  stated  hi  their  annual  report  for  1888  that  their 
company  had  retired  altogether  from  certain  classes  of  through 

1  Chron.  47 :  575,  1888.   It  is  impossible  to  give  an  adequate  account  of  these  wars 
without  straying  too  far  from  our  subject.    Some  of  the  methods  by  which  rebates 
were  granted  are  revealed  in  the  case  of  Jacob  Shamberg  v.  Del.,  Lack.  &  W.  R.  R. 
Co.  et  a/.,  4  I.  C.  C.  Rep.  630.  The  differential  question  took  on  a  new  phase  in  1888 
through  the  demand  of  weaker  roads  for  protection  against  stronger.  This  had  long 
been  a  demand  of  the  Grand  Trunk,  and  had  been  conceded  to  it  in  the  last  part 
of  1887.   In  January,  1888,  the  Pennsylvania  and  the  New  York  Central  agreed  to 
allow  besides  a  differential  rate  to  the  Erie,  the  Lackawanna,  the  West  Shore,  and 
the  Baltimore  &  Ohio,  which  should  vary  from  five  cents  per  hundred  pounds  from 
Chicago  to  New  York  on  first  class  to  one  cent  on  fifth  and  sixth  classes.  R.R.  Gaz.  20 : 
26, 1888;  Chron.  46:57,  1888.  This  did  not  prevent  active  warfare  throughout  the  year. 

2  Known  as  the  Presidents'  and  Bankers'  Agreement. 

3  There  was,  however,  a  shortage  in  the  wheat  crop  in  1888. 


1 8  RAILROAD  REORGANIZATION 

business  for  a  time  during  the  preceding  twelve  months,  owing  to 
the  un remunerative  level  of  rates.  Conditions  during  the  greater 
part  of  1889  were  better,1  and  during  the  following  three  years 
constant  attempts  at  agreement  and  arbitration,  joined  with  a  con- 
siderable volume  of  business,2  prevented  a  long  continuance  of  any 
difficulties  which  arose. 

It  was  perhaps  traffic  conditions  such  as  we  have  described 
which  led  the  Garrett  family  to  favor  a  community  of  interest 
scheme  which  should  improve  the  Baltimore  &  Ohio  connections 
with  the  West.  In  June,  1890,  Mr.  E.  R.  Bacon  formed  a  syndicate 
to  control  the  stock  of  the  Baltimore  &  Ohio  Company.  Acting 
hi  harmony  with  the  Garrett  family,  the  syndicate  was  made  up 
of  Philadelphia,  New  York,  Baltimore,  and  Pittsburg  capitalists, 
including  the  Richmond  Terminal,  Pittsburgh  &  Western,  Northern 
Pacific,  and  Reading  interests.  The  plan  was  to  establish  a  com- 
munity of  interest  between  a  vast  network  of  lines  reaching  from 
the  Atlantic  to  the  Pacific,  and  from  New  York  to  the  Mississippi. 
"The  buyers,"  it  was  said,  "came  in  simply  as  investors  without 
condition  that  their  other  properties  would  be  benefited,  although 
it  was  of  course  intimated  that  something  was  to  be  done."  3  They 
were  required  to  pool  their  stock  for  three  years,  and  to  give  an 
irrevocable  proxy  for  that  period  to  President  Charles  F.  Mayer. 
The  amount  of  the  syndicate  purchase  was  45,000  shares,  of  which 
32,500  were  obtained  from  the  city  of  Baltimore,  and  9686  (pre- 
ferred) from  the  state  of  Maryland;4  and  the  purchase  brought 

1  The  comparative  peace  of  1889  was  due  as  much  to  the  abundance  of  traffic 
offering  as  to  the  efficacy  of  the  agreement  concluded  in  February  of  that  year. 
According  to  the  Chronicle  the  apportionment  of  traffic  then  contemplated  proved 
difficult  to  carry  out,  and  considerable  discontent  arose.   Chron.  50:892,  1890. 

2  In  1890  difficulties  occurred  through  the  competition  of  the  Canadian  Pacific, 
and  more  particularly  through  the  attempt  of  the  Lake  Shore  to  reduce  the  differ- 
ential formerly  granted  to  the  Grand  Trunk.  Chron.  50: 850,  1890.  The  matter  was 
left  to  arbitration,  Chron.  51 :  625,  with  the  result  that  the  lines  north  of  Lake  Ontario 
were  allowed  to  charge  two  and  one-half  cents  less  per  hundred  pounds  on  dressed 
beef  to  the  seaboard  than  the  lines  further  south.  R.  R.  Gaz.  23:64, 1891.  This  had 
the  effect  of  putting  the  Canadian  Pacific  on  an  equality  with  the  Grand  Trunk. 
Late  in  1892  still  another  agreement  between  the  trunk  lines  was  found  necessary 
to  maintain  rates.    Chron.  55:857,  1892. 

3  Ry.  Rev.  30:  382,  1890. 

4  Chron.  50:  800,  1890;  Ibid.  50:  833,  1890;  Ry.  Rev.  30:348,  1890;  R.  R.  Gaz. 
22 : 448,  1890. 


BALTIMORE  &  OHIO  19 

the  incidental  advantage  of  removing  city  and  state  from  any  direct 
interest  in  the  road.  The  preferred  state  stock  the  syndicate  later 
exchanged  for  common  stock  owned  by  the  Johns  Hopkins  Univers- 
ity. The  purchase  once  made,  the  pool  was  formed  on  well-known 
lines.  The  stock  was  deposited  with  a  trust  company,  trust  certi- 
ficates were  issued,  and  proxies  transferred  to  Charles  F.  Mayer.1 
The  shares  to  be  deposited  were  limited  in  amount  to  110,000;  the 
actual  amount  put  in  was  89,750.  The  results  of  the  agreement  were 
less  sensational  than  the  forecasts  made.  It  undoubtedly  did  much 
to  promote  friendly  feeling  among  the  roads  concerned.  When, 
in  1891,  the  Baltimore  &  Ohio  was  compelled  to  vacate  the  Chicago 
terminals  of  the  Illinois  Central,  which  it  had  occupied  for  years, 
it  was  able  to  make  prompt  arrangements  with  a  corporation  con- 
trolled by  the  Northern  Pacific  for  the  use  of  its  facilities  both  for 
passengers  and  for  freight.  But  the  influence  of  the  Garrett  family 
was  not  lessened,  and  inasmuch  as  the  main  competitors  of  the 
Baltimore  &  Ohio  were  not  included  there  was  no  check  to  com- 
petition, and  earnings  showed  no  striking  change. 

Matters  stood  thus  at  the  beginning  of  i893-2  No  progress  had 
been  made  toward  restoring  the  Baltimore  &  Ohio  to  a  perman- 
ently stable  condition,  and  the  prosperity  which  its  reports  declared 
was  fictitious  only.  The  reorganization  to  which  bondholders  had 
refused  to  submit  in  the  comparatively  prosperous  times  of  1888 
was  compelled  by  the  depression  following  the  panic  of  1893.  In 
1894  earnings  fell  off.  The  gross  earnings  for  the  year  ending  June 
30,  1893,  were  $26,214,807,  and  the  net  income  $9,210,666;  the  fol- 
lowing year  the  same  items  were  $22,502,662  and  $8,719,830.  The 
directors  reduced  the  dividend  and  called  attention  to  the  losses 
incurred  through  protracted  strikes  in  the  coal  and  coke  industry.3 

1  Application  for  listing  of  Trustee  certificates,  Chron.  54:  369,  1892. 

2  Certain  extensions  had  been  made,  which  it  is  not  necessary  to  describe  at  length. 
The  most  important  had  been  those  of  the  Pittsburgh  &  Western  in  1891,  Chron. 
52:  238,  1891,  the  Akron  &  Chicago  Junction,  Chron.  53:  756,  1891,  and  the  West 
Virginia  &  Pittsburgh,  Chron.  54:  725,  1892.  In  1893  the  Baltimore  &  Ohio  South- 
western and  the  Ohio  &  Mississippi  Railway  companies  consolidated,  and  the  Balti- 
more  &  Ohio  guaranteed  the  principal  and  interest  of  the  first  consolidated  mort- 
gage gold  bonds  of  the  consolidated  company  for  $25,000,000.  Chron.  56:  332,  1893. 

3  Chron.  59:  696,  1894.   In  October,  1893,  the  Baltimore  &  Ohio  was  borrowing 
in  London  on  one  year  5  per  cent  promissory  notes,  and  2  per  cent  commission,  pay- 
ing, therefore,  an  equivalent  of  7  per  cent  interest.   Ry.  Times,  64 :  499,  1893. 


20  RAILROAD  REORGANIZATION 

The  following  January  (1895)  President  Mayer  stated  that  the 
fixed  charges,  including  the  car  trusts,  sinking  funds,  etc.,  due 
January  i,  amounting  to  nearly  $1,000,000,  had  been  paid  with- 
out borrowing  one  dollar.  "I  name  this  fact  especially,"  said  he, 
"because  it  is  not  unusual  for  us  to  make  a  loan  for  the  unusually 
heavy  payments  January  i.  I  doubt  if  the  Baltimore  &  Ohio 
has  owed  so  small  a  floating  debt  for  twelve  or  fifteen  years, 
perhaps  longer,  and  it  never  had  the  large  volume  of  stocks  and 
bonds  it  now  has,  something  over  $16,000,000,  not  put  down  at 
their  face  value  but  rather  at  their  market  value,  or  far  below  their 
intrinsic  value.  I  can  safely  say  the  road  has  not  been  in  so  strong 
a  position  as  now  for  at  least  fifteen  years."  l 

It  required  more  than  confident  statements  by  the  managers, 
however,  to  demonstrate  the  secure  position  of  the  road ;  and  this 
all  the  more  because  the  acts  of  these  gentlemen  belied  their  public 
assertions.  Dividends  on  the  common  stock  were  passed  in  1895, 
and  again  in  1896.  The  ratio  of  charges  to  earnings,  according  to 
the  company's  reports,  rose  from  75  per  cent  of  net  earnings  in 
1894  to  80.2  per  cent  in  1895,  and  to  98.2  per  cent  in  1896;  that 
is,  less  than  2  per  cent  of  the  net  earnings  of  $6,300,000  was  admitted 
to  be  available  for  dividends  on  $30,000,000  of  stock.2  Some  relief 
was  evidently  necessary.  In  January,  1896,  it  was  announced  that 
arrangements  had  been  made  with  a  strong  syndicate  to  provide 
for  all  immediate  financial  requirements;  but  the  appointment  of 
receivers  in  February  could  scarcely  have  come  as  a  surprise. 
During  the  two  weeks  just  before  the  failure  Mr.  J.  K.  Cowen, 
who  had  succeeded  Mr.  Mayer  in  the  presidency,  spent  a  great 
deal  of  time  in  New  York  trying  to  borrow  money  to  meet  the 

1  Chron.  60:  42,  1895. 

2  In  1895  the  directors  speak  of  the  unremunerative  rates  prevailing.    Chron. 
60:  711, 1895.   At  the  end  of  the  year  Mr.  Alexander  Shaw,  chairman  of  the  board 
of  directors,  felt  called  upon  to  say,  "The  two  subjects  which  are  giving  the  new 
board  of  directors  the  most  to  think  about  are  the  floating  debt  and  the  future 
management  of  the  property.  We  have  to  fund  the  former,  and  as  to  the  latter  there 
is  a  difference  of  opinion  among  the  directors.  ...   I  deny  specifically  that  the  Jan- 
uary interest  on  the  bonds  of  the  company  will  be  passed ;  that  a  receivership,  either 
friendly  or  otherwise,  is  contemplated;  that  the  Baltimore  &  Ohio  and  the  Southern 
Railway  systems  are  to  be  consolidated;  and  the  statements  that  there  has  been  an 
irregularity  in  the  manner  of  keeping  the  books  of  the  company."  Chron.  61 :  1153, 
1895. 


BALTIMORE  &  OHIO  21 

pressing  demands.  On  his  eventual  failure  and  return  to  Balti- 
more the  directors  felt  that  a  friendly  receivership  was  the  only 
resource.1 

To  the  well-wishers  of  the  road  this  failure  may  have  seemed 
an  opportunity  as  well  as  a  disaster.  It  was  now  possible  to  accom- 
plish what  the  management  in  1888  had  refused  to  attempt,  i.  e. 
a  reduction  in  the  fixed  charges  of  the  company  which  should  re- 
move the  burdens  under  which  the  road  had  labored,  and  should 
open  up  the  way  for  a  long  period  of  improvement  and  prosperity. 
At  least  one  more  unpleasant  experience  was,  however,  to  be  passed 
through.  With  a  view  to  determining  the  Baltimore  &  Ohio's  real 
position,  an  expert  accountant,  Mr.  Stephen  Little,  had  been  set 
to  work  upon  its  books,  and  from  time  to  time  notices  had  been 
appearing  that  he  was  at  work,  that  his  examinations  confirmed 
the  statements  of  the  company,  and  that  questions  raised  by  hostile 
critics  would  be  considered  in  his  report.  Thus  in  April  a  reorgan- 
ization committee,  composed  of  Messrs.  Alexander  Shaw,  C.  Morton 
Stuart,  and  six  others,  with  whom  were  deposited  the  Garrett  shares, 
issued  a  circular  referring  to  the  large  amount  of  new  capital,  es- 
timated by  them  at  $30,000,000,  which  had  been  received  by  the 
company  since  1888  "without  adequate  or  satisfactory  results,"  and 
to  the  floating  debt,  which  they  asserted  had  been  increased  from 
about  $3,500,000  to  $16,000,000.  "We  make  no  charges,  or  even 
intimations  of  wrongdoing,"  wrote  their  secretary,  "but  desire  and 
require  that  a  full  explanation  of  the  management  of  the  property 
from  the  year  1888,  when  the  road  was  set  on  its  feet  by  Mr. 
Morgan,  shall  be  given,  and  that  the  causes  which  led  to  the  wreck- 
ing of  the  property  shall  be  clearly  shown."  To  which  another 
.committee,  which  directly  represented  the  management,  replied  by 
reference  to  Mr.  Little.2 

The  much-heralded  report  came  out  hi  December,  having  been 
withheld  since  the  previous  March  for  fear  of  the  effect  on  the 
company's  securities ;  and  so  far  from  sustaining  the  management, 
it  contained  charges  of  irregularity  almost  as  sensational  as  those 
made  against  the  Atchison  at  an  earlier  date.  The  books  of  the 
company,  according  to  Mr.  Little,  were  in  error  to  the  amount  of 

1  Ry.  Rev.  36: 138,  1896.   The  receivers  were  appointed  February  29. 

2  Chron.  62:777,  l896- 


22  RAILROAD  REORGANIZATION 

$11,204,858.    During  the  period  of  seven  years  and  two  months 
which  his  report  covered  he  found : 

An  overstatement  of  net  income  of  $2,721,068 

A  mischarge  of  worn-out  equipment  to  profit  and  loss  of  2,843,596 
Improper  capitalization  of  charges  to  income  under  the  head  of 

construction,  main  stem,  2,064,741 
Improper  capitalization  of  so-called  improvements  and  betterments 

of  leased  and  dependent  roads,  3>575>453 
Total,  $11, 204,85s1 

Deducting  these  sums  from  the  annual  income  returns  of  the 
company,  he  found  that  but  $971,447  had  been  earned  which  had 
been  properly  applicable  to  dividends,  whereas  $6,269,008  had  been 
declared  in  the  seven  years,  of  which  $3,312,089  were  cash  and 
$2,956,920  stock.  Earnings  had  been  increased  by  the  most  arbi- 
trary of  book-keeping  devices.  In  1892  the  value  of  the  Western 
Union  stock  held  in  the  treasury  since  the  sale  of  the  Baltimore  & 
Ohio  telegraph  lines  in  1888  had  been  written  up  $468,038,  and 
the  stock  of  another  company,  the  Consolidated  Coal  Company, 
had  been  written  up  $114,300.  Not  only  had  advances  to  branch 
lines  been  entered  as  assets,  but  the  interest  on  these  advances  had 
been  credited  to  income,  the  only  basis  being  that  it  was  hoped  that 
such  interest  would  some  day  be  paid ;  and  on  the  other  side  of  the 
account,  charges  against  operating  expenses  had  been  charged  to 
profit  and  loss  on  the  same  principles  by  which  the  Garretts  had 
rolled  up  their  fictitious  surplus  of  1888.  Turning  to  the  capital 
account,  Mr.  Little  showed  an  increase  in  liabilities  from  1888  to 
1895  of  $22,180,000,  not  including  $5,481,835  representing  chiefly 
the  company's  endorsements  of  notes  of  its  subsidiary  roads  which 
stood  here  for  the  first  time  revealed.  This  money  apparently  had 
been  put  into  the  property,  and  yet  Mr.  Little's  corrected  figures 
showed  net  earnings  to  be  actually  smaller  in  1895  than  in  the  ear- 
lier years.  Criticisms  of  the  report  attached  themselves  mainly  to 
the  last  items  treated.  That  the  extensive  endorsement  of  branch- 
line  notes,  absent  as  any  mention  of  the  practice  was  from  the  an- 
nual reports,  was  most  misleading  and  unsound,  nobody  could  deny ; 

1  The  period  covered  was  from  September  30,  1888,  to  November  30,  1895. 
Report  of  Mr.  Stephen  Little  to  General  Louis  Fitzgerald,  chairman  of  the  reorgan- 
ization committee. 


BALTIMORE   &  OHIO  23 

but  the  broad  question  of  what  charges  during  the  seven  years 
should  have  been  paid  out  of  income,  and  what  not,  gave  rise  to 
lively  discussion.  Severe  strictures  on  Mr.  Little's  statements  were 
made  by  Patterson  and  Corwin,  two  accountants  appointed  to  re- 
examine  the  books  of  the  company.  "It  would  appear,"  said  they, 
"that  Mr.  Little  has  made  some  curious  errors,  and  has  been  strik- 
ingly inconsistent."  l  Nevertheless  the  more  damaging  of  the  lat- 
ter's  accusations  seem  to  have  been  accepted,  and  the  Baltimore  & 
Ohio  took  its  place  with  other  American  corporations,  the  manage- 
ments of  which  have  indulged  in  secret  juggling  with  the  books. 

Pending  Mr.  Little's  report,  reorganization  was  of  course  delayed. 
The  receivers  were  then  in  control,2  and  under  their  direction  a 
vigorous  policy  of  improvement  was  carried  out.  The  rolling  stock 
of  the  system  was  found  to  be  insufficient  to  handle  its  business, 
and  the  motive  power  was  in  similar  condition.  All  testified  to  the 
consistent  desire  of  the  old  management  to  employ  every  device 
which  might  contribute  to  greater  apparent  earnings.  Contracts 
for  5000  freight  cars  were  let  as  early  as  May,  1896,  to  be  paid  for 
in  receivers'  certificates,  and  bids  for  75  locomotives  were  at  the 
same  time  received.3  During  their  whole  administration  the  re- 
ceivers purchased  over  28,000  freight  cars,  216  locomotives,  123,000 
tons  of  rails,  besides  ties,  ballast,  new  steel  bridges,  and  miscel- 
laneous improvements  of  various  sorts.4  On  the  financial  side  they 
had  to  resist  an  attempt  to  compel  payment  of  dividends  on  the 
preferred  stock.  The  case  dragged  on  through  1897  and  1898,  and 
was  finally  decided  in  favor  of  the  company.5 

After  the  publication  of  Mr.  Little's  report  there  remained  no 
serious  bar  to  reorganization,  while  the  needs  to  be  met  were  more 
apparent  than  ever  before.  If  the  proportion  of  charges  to  earnings 

1  Chron.  64  :  999,  1897. 

2  President  J.  K.  Cowen,  Vice-President  Oscar  G.  Murray. 

3  Chron.  62:  907,  1896. 

4  Ibid.  69:  128,  1899. 

5  R.  R.  Gaz.  28:  781,  1896;  Ibid.  29:  563,  1897  ;  Chron.  65:  no,  1897 ;  Ry.  Rev. 
38:  628,  1898.  The  status  of  the  Baltimore  &  Ohio  stock  was  somewhat  peculiar,  in 
that  when  first  issued  to  the  state  of  Maryland  it  had  been  accompanied  by  a  guaran- 
tee, or  conditional  guarantee,  of  dividend  payments ;  and  Johns  Hopkins  University, 
to  which  the  stock  had  been  transferred,  maintained  that  this  contract,  added  to  the 
continuous  payment  of  dividends  for  over  fifty  years,  gave  them  rights  even  against 
the  bondholders. 


24  RAILROAD  REORGANIZATION 

had  been  too  heavy  on  the  management's  own  showing,  how  much 
more  burdensome  was  it  when  the  reported  earnings  had  been 
proved  too  high,  and  the  reported  liabilities  too  low !  The  first  step 
after  the  appointment  of  receivers  had  been  the  springing  up  of 
reorganization  committees.  The  two  most  prominent  were  the 
Fitzgerald  Committee,  representing  the  directors,  and  the  Baltimore 
Committee.  There  were  besides  committees  representing  the  5  per 
cent  bonds  of  the  loan  of  1885,  the  consolidated  mortgage  55,  the 
6  per  cent  bonds  of  1874,  the  preferred  stock,  and  others.  These 
were  all  to  some  extent  antagonistic.  It  was  hoped  to  secure  a  re- 
organization without  foreclosure,  but  to  provide  against  all  con- 
tingencies a  bill  was  introduced  and  passed  through  the  Maryland 
legislature,  permitting  a  new  company  to  succeed,  after  reorganiza- 
tion, to  the  property  of  the  Baltimore  &  Ohio  system. 

By  April,  1898,  a  reorganization  plan  was  ready,  and  was  with- 
held only  on  account,  first  of  the  threatened,  and  then  of  the  actual, 
war  with  Spain.  Two  months  later  this  difficulty  seemed  no  longer 
serious,  and  a  plan  was  formally  announced.1  There  were  contem- 
plated two  great  issues  of  bonds  and  two  of  stock  as  follows : 

3$  per  cent  prior  lien  gold  bonds,  $70,000,000 

4  per  cent  first  mortgage  gold  bonds,  50,000,000 

4  per  cent  non-cumulative  preferred  stock,  35,000,000 

Common  stock,  35,000,000 

These  were  to  be  parts  of  larger  amounts  authorized  but  not  issued. 
Thus  the  authorized  amount  of  prior  liens  was  $75,000,000,  of 
which  $5,000,000  were  to  be  reserved,  and  to  be  issued  after  January 
i,  1902,  at  the  rate  of  not  exceeding  $1,000,000  a  year,  for  enlarge- 
ment, betterment,  or  extension  of  properties  covered  by  the  prior  lien 
mortgage ;  or  for  the  acquisition  of  additions  thereto.2  The  author- 
ized amount  of  first  mortgage  45  was  $165,000,000.  Since  the  prior 
liens  matured  in  1925,  and  this  mortgage  not  till  1948,  $75,000,000 
were  reserved  for  retirement  of  the  prior  issue.  $7,000,000  were 

1  Chron.  66:  1235,  1898. 

2  The  prior  lien  bonds  were  "to  be  secured  by  a  mortgage  upon  the  main  line  and 
branches,  Parkersburg  Branch  and  Pittsburg  Division  when  acquired  by  the  new 
company,  covering  about  1017  miles  of  first  track,  and  about  964  miles  of  second, 
third,  and  fourth  track  and  sidings,  and  also  all  the  equipment  now  owned  by  the 
company  of  the  value  of  upward  of  $20,000,000,  or  hereafter  acquired  in  any  manner 
by  the  use  of  the  $34,000,000  reserved  first  mortgage  bonds,  as  hereinafter  stated." 


BALTIMORE   &  OHIO  25 

further  put  aside  for  the  new  company;  $6,000,000  for  the  retire- 
ment of  the  Baltimore  Belt  Line  53,  and  $27,000,000  for  enlarge- 
ments, betterments,  or  extensions,  etc.,  at  a  rate  not  exceeding 
$1,500,000  a  year  for  four  years,  and  not  exceeding  $1,000,000  a 
year  thereafter.1  The  reserves  from  these  two  mortgages,  there- 
fore, made  liberal  provision  for  new  capital  requirements.  All  of  the 
common  stock  authorized  was  to  be  issued  at  once;  but  besides 
the  $35,000,000  preferred  stock  before  mentioned,  $5,000,000  pre- 
ferred were  to  be  held  in  reserve  for  the  new  company. 

Of  the  immediate  issues  $60,073,090  prior  liens,  $36,384,535 
first  mortgage  45,  $17,218,700  preferred  stock,  and  $31,178,000 
common  stock  went  toward  the  retirement  of  old  securities;  and 
$9,000,000  prior  liens,  $12,450,000  first  mortgage  43,  and  $16,450,000 
preferred  stock  were  for  cash  requirements.  The  better  of  the  old 
mortgages  received  cash  for  their  overdue  interest,  something  over 
par  in  prior  liens  for  their  principal,  and  from  12  J  to  32  per  cent 
in  first  mortgage  45  and  preferred  stock  to  compensate  for  reductions 
in  their  annual  return.  Inferior  bonds  received  new  first  mortgage 
4S  with  preferred  stock  (except  in  one  instance)  as  a  douceur.  The 
old  stock,  common  and  preferred,  and  the  Washington  City  &  Point 
Lookout  6s  got  mostly  new  stock  for  the  principal  of  their  hold- 
ings, and  preferred  stock  for  their  assessments.  The  fundamental 
principle  on  which  the  exchanges  were  based  was  the  retirement 
of  old  bonds  bearing  high  interest  rates  by  an  increased  volume  of 
new  bonds  bearing  lower  rates;  thus  permitting  a  much  smaller 
reduction  hi  fixed  charges  than  occurred  in  other  reorganizations 
which  we  shall  consider.  To  some  extent  reductions  in  annual 
yield  were  made  up  by  allowance  of  preferred  stock.  The  consol- 
idated mortgage  53  of  1887,  on  which  interest  was  reduced  from  $50 
annually  to  $41.75,  received  $85  in  4  per  cent  preferred  stock  as  a 

1  The  first  mortgage  45  were  to  be  a  first  lien ' '  upon  the  Philadelphia,  Chicago,  and 
Akron  divisions  and  branches  and  the  Fairmount,  Morgantown  &  Pittsburg  Rail- 
road, covering  about  570  miles  of  first  track,  and  about  332  miles  of  second,  third,  and 
fourth  track  and  sidings,  and  also  on  the  properties  now  included  in  the  present 
Baltimore  &  Ohio  Terminal  mortgages  of  1894,  when  said  lines  and  properties  are 
acquired  by  the  new  company;  also  on  the  Baltimore  Belt  Railroad,  if  and  when 
the  same  shall  be  acquired  by  the  new  company.  They  will  also  be  a  lien  subject 
to  the  prior  lien  mortgage  upon  the  lines,  properties,  and  equipment  covered  by  the 
latter." 


26 


RAILROAD  REORGANIZATION 


compensation.  The  Baltimore  &  Ohio  Loan  of  1874  saw  a  reduction 
in  interest  from  $60  to  $40.41,  partially  made  up  from  the  divi- 
dends on  $160  of  new  preferred  stock.  In  fact,  out  of  thirteen  cases 
in  which  new  bonds  were  given  for  old,  ten  included  an  allowance 
of  preferred  stock,  thus  bringing  the  Baltimore  &  Ohio  in  line  with 
other  reorganizations  of  the  period.  But  the  proportion  of  preferred 
stock  given  was  small  in  each  case,  and  the  principle  was  not  well 
carried  out.1 

The  cash  requirements  of  the  system  were  estimated  at  $36,092,- 
500 ;  being  swelled  by  arrears  of  interest,  receivers'  certificates,  need 
for  working  capital,  reorganization  expenditures,  and  the  like.  The 
plan  proposed  to  cancel  them  by  assessments  on  stockholders  and  by 
the  sale  of  securities  before  described.  On  the  first  preferred  stock, 
$2  a  share  was  levied,  $20  on  the  second  preferred,  and  $20  on  the 
common  stock,  with  a  syndicate  guarantee  for  each.  This  netted 
$5,460,000.  Stockholders  received  new  preferred  stock  for  their 
payments.  Deducting  $5,460,000  preferred  stock  from  the  secur- 
ities reserved  under  the  plan  to  be  sold  for  cash,  there  remained 
$9,000,000  prior  liens,  $12,450,000  first  mortgage  45,  and  $10,990,- 
ooo  preferred  stock,  or  a  total  of  $32,440,000;  all  of  which  a  syn- 
dicate agreed  to  take.2  In  addition  the  company  disposed  of  se- 

1  Annual  Yield  of  Old  and  New  Securities: 

Annual  re- 
Annual  re-  turn  from  new 
Previous  an-  turn  from  new  bonds  and 

Loan                                       nual  return  bonds  given  stock  given 

B.  &  O.  Loan,  1853                                  $40  $40.87  $46.4? 

Consol.  Mtg.  55,  1887                                  50  41.75  44.35 

Loan  of  1872                                                  60  40.41  42.01 

Loan  of  1874                                                  60  40.41  46.81 

Parkersburg  Br.  6s                                        60  41-75  41-75 

P.  &  C.  ist  Ex.  45                                         40  40.87  42.70 

P.  &  C.  ist  75                                                70  40.00  40.00 

B.  &  O.  55,  Loan  of  1885                             50  40.00  44.00 

P.  &  C.  Consol.  6s                                        60  40.67  48.67 

Chicago  Div.  53                                            50  46.30  50.30 

Phila.  Div.  4$s                                               45  40.00  50.60 

B.  &  O.  4j  Term.  Bs                                   45  40.00  40.00 

Akron  &  Chicago  June.  55                           50  40.00  42.00 

2  Headed  by  Messrs.  Speyer  &  Co.  and  Kuhn,  Loeb  &  Co.  of  New  York,  and 
Messrs.  Speyer  Bros,  of  London.    R.  R.  Gaz.  30:  733,  1898. 


BALTIMORE   &  OHIO  27 

curities  in  the  treasury,  including  $3,800,000  stock  of  the  Western 
Union  Telegraph  Company,  for  $3, 500,000. l 

Both  classes  of  stock  were  vested  in  five  voting  trustees,  for  a 
period  of  five  years.  The  trustees  might,  however,  deliver  the 
stock  at  an  earlier  date  hi  their  discretion,  and  in  fact  did  so  hi 
August,  1901.  No  additional  mortgage  was  to  be  put  upon  the 
property,  and  no  increase  in  the  amount  of  the  preferred  stock  was 
to  be  made,  except  in  each  instance  after  obtaining  the  consent  of 
the  holders  of  a  majority  of  the  whole  amount  of  preferred  stock 
outstanding,  given  at  a  meeting  of  the  stockholders  called  for  that 
purpose,  and  the  consent  of  the  holders  of  a  majority  of  such  part 
of  the  common  stock  as  should  be  represented  at  such  meeting, 
the  holders  of  each  class  of  stock  voting  separately.  During  the 
existence  of  the  voting  trust  similar  consent  of  holders  of  like 
amounts  of  the  respective  classes  of  trust  certificates  was  to  be 
necessary  for  the  purposes  indicated.  Only  a  portion  of  the  leased 
and  dependent  lines  were  provided  for  in  the  plan,  but  the  various 
cases  were  left  to  be  passed  on  separately.  Thus  the  Baltimore 
Belt  Line  was  finally  leased  at  a  rental  equivalent  to  4  per  cent 
on  the  outstanding  5  per  cent  bonds;  while  the  acquisition  of  the 
Baltimore  &  Ohio  Southwestern  and  the  Central  Ohio  railroads 
involved  the  payment  of  a  cash  bonus,  and  an  increase  in  the  pre- 
ferred and  common  stock  outstanding.  The  mileage  of  the  system 
suffered  little  change.  Many  of  the  branches  were  sold  at  fore- 
closure, and  bought  hi  by  the  parent  line ;  and  a  glance  at  the  bal- 
ance-sheet hi  1899  shows  that  besides  the  prior  liens  and  the  first 
45,  an  issue  of  Pittsburg  Junction  and  Middle  Division  bonds  was 
the  principal  tool  employed.  These  securities,  bearing  3^  per  cent, 
and  falling  due  in  1925,  were  issued;  ist,  to  retire  branch-line 
securities,  and  to  weld  the  system  into  one  united  whole;  and  2d, 
to  provide  new  capital  for  enlargement  and  betterment  and  ex- 
tension. 

The  success  of  this  Baltimore  &  Ohio  reorganization  plan  was 
very  largely  due  to  the  time  at  which  it  was  put  through.  In  other 
words,  the  reorganization  was  completed  just  when  an  unparalleled 

1  The  Western  Union  stock  was  sold  to  the  same  syndicate  which  took  the  Baltimore 
&  Ohio's  securities,  at  a  price  said  to  be  about  90.  At  this  price  the  yield  would  have 
been  $3,420,000 ;  so  evidently  very  little  other  stock  was  sold. 


28  RAILROAD  REORGANIZATION 

era  of  prosperity  was  fairly  under  way.  The  moderate  reduction 
in  fixed  charges  which  it  secured  proved  more  than  adequate  when 
earnings  rapidly  grew.  The  net  earnings  of  the  property  for  the 
year  ending  June  30,  1898,  were  estimated  at  $7,724,758,  and  the 
new  fixed  charges  were  set  at  $6,252,351. l  Net  earnings  for  1899 
were  $6,621,599.  In  1900,  on  a  mileage  n  per  cent  greater,  they 
were  $12,359,443,  and  fixed  charges  were  $6,831,463  only.  In 
subsequent  years,  with  an  increase  both  in  mileage  and  in  earn- 
ings, the  margin  between  charges  and  income  further  increased.  In 
1903  $3,500,000  were  spent  out  of  earnings  for  additions  and  im- 
provements ;  $7,370,482  were  declared  in  dividends ;  and  $2,947,681 
were  carried  to  surplus.  In  1907  $3,000,000  were  spent  in  addi- 
tions and  improvements,  $6,965,245  paid  in  dividends,  $7,480,385 
carried  to  surplus.  This  situation  was  in  no  way  due  to  the  re- 
organization plan,  and  would  have  restored  the  company  to  solv- 
ency even  if  no  reorganization  had  taken  place.  It  may  be  said  that 
the  receivership  did  much  to  enable  the  road  to  take  advantage 
of  the  later  prosperity.  The  character  of  the  receivers'  work  has 
been  mentioned.  By  June  30,  1899,  they  had  spent  as  much  as 
$17,000,000  for  cars  alone,  $2,500,000  for  locomotives,  $2,100,000 
for  rails,  and  other  sums  for  improvements  and  renewals  of  all  kinds. 
The  maintenance  of  way  pay-rolls  in  three  years  amounted  to  nearly 
$12,000,000,  and  the  total  expenditure  aggregated  about  $35,000,000; 
of  which  $15,000,000  were  secured  by  the  issue  of  receivers'  cer- 
tificates, and  the  balance  through  car  trusts,  earnings  from  the 
property,  and  from  the  reorganization  managers.2  This  was  an 
indispensable  and  invaluable  preliminary  to  a  growth  in  earnings, 
but  was,  however,  distinct  from  the  financial  problems  of  reorgan- 
ization. In  brief,  the  Baltimore  &  Ohio  increased  its  nominal 
capitalization  more,  and  reduced  its  fixed  charges  less  than  any  of 
the  seven  other  reorganizations  of  the  nineties  which  we  shall  con- 
sider except  the  Erie.  Its  need  was  perhaps  less  crying,  but  not 
sufficiently  so  to  explain  the  difference. 

It  will  be  remembered  that,  while  provision  had  early  been  made 
for  foreclosure,  it  had  been  hoped  to  avoid  such  a  drastic  step.  Hopes 
in  this  respect  were  fulfilled,  and  while  a  number  of  branch  lines  were 

1  In  fact  they  were  never  quite  so  low  as  this. 
3  Chron.  69:  128,  1899. 


BALTIMORE   &  OHIO  29 

sold  the  main  stem  escaped.  Vigorous  objections  to  the  plan  came 
from  the  preferred  stock,  which  was  in  1898  suing  to  compel  pay- 
ment of  its  dividends.  In  July,  at  a  meeting  of  shareholders  it  was 
declared  to  be  the  sense  of  the  meeting  that  the  preferred  stock  could 
not  justly  be  required  to  deter  mine  whether  it  would  accept  the  pro- 
position published  by  the  reorganization  committee  before  the  case 
hi  the  Supreme  Court  should  be  decided.1  Late  in  July  an  injunction 
was  obtained,  which,  however,  was  dissolved  in  October.  Still  later 
in  that  year  the  suits  were  settled  by  the  sale  of  the  bulk  of  the  first 
preferred  stock  to  the  reorganization  committee.2  The  only  other 
considerable  complaint  came  from  the  holders  of  the  4^  per  cent 
Baltimore  &  Ohio  Terminal  bonds,  and  was  a  protest  against  the 
reduction  of  \  per  cent  in  their  interest  without,  as  they  said,  the 
smallest  compensation.  Suits  for  the  foreclosure  of  the  mortgages 
of  1887,  1872,  and  1874  were  instituted  in  October,  1898.  Decrees 
were  obtained  hi  February.  Decrees  were  also  given  against  the 
Philadelphia  Division,  the  Parkersburg  Branch,  the  Staten  Island 
Rapid  Transit  Company,  and  others.  Separate  receivers  had  pre- 
viously been  appointed  for  the  Sandusky,  Mansfield  &  Newark, 
the  Central  Ohio,  the  Washington  Branch,  and  others.  Decrees 
were  not  asked  for  against  the  main  line.  In  August,  1898,  only 
three  months  after  the  publication  of  the  plan,  the  reorganization 
managers  were  able  to  pronounce  it  effective. 

The  receivers  surrendered  control  July  i,  1899^  and  the  com- 
pany started  on  its  new  career  amid  a  buzz  of  satisfaction  from 
all  who  had  participated  in  its  reorganization.  In  an  address  before 
the  Maryland  Bar  Association  Mr.  John  K.  Cowen  summarized  the 
result  as  follows : 

(1)  Every  bondholder  of   the  Baltimore  &  Ohio  Railroad  has 
received  new  securities  which  substantially  pay  his  full  debt.    In 
other  words,  the  bondholders  have  been  paid  in  full. 

(2)  The  floating  debt  creditors  have  received  every  cent  of  their 
indebtedness. 

(3)  The  first  preferred  stockholders  have  received  in  cash  75  per 
cent  of  the  par  value  of  their  stock,  the  court  overruling  their  claim 
of  preference  over  the  bondholders  and  creditors.   The  second  pre- 
ferred stockholders  have  received  securities  which,  after  payment 

1  Chron.  67:  27,  1898.  2  Ry.  Rev.  38:  656,  1898.  3  R.  R.  Gaz.  31 :  500,  1899. 


30  RAILROAD  REORGANIZATION 

of  the  assessment,  net  about  $70  per  share,  at  the  market  price, 
and  at  times  over  $80  net  could  have  been  realized. 

(4)  The  common  stockholders,  instead  of  being  wiped  out,  have 
received  their  common  stock  in  the  new  company  upon  paying  an 
assessment,  the  net  amount  of  which  (because  of  the  value  of  the 
securities  received  for  such  assessment)  would  not  exceed  $5  or  $6. 

(5)  The  company  saves  its  old  charter  for  whatever  value  may 
be  attached  to  it.1 

This  statement  presents  the  favorable  side  of  the  picture.  On  the 
whole,  securityholders  were  tenderly  handled,  though  the  bond- 
holders were  by  no  means  paid  off  in  full.  And  on  the  other  hand, 
this  very  tenderness  made  a  voluntary  reorganization  possible, 
whereby  the  charter  of  the  company  was  saved.  The  pertinent 
objections  were  from  the  point  of  view  of  the  company  itself,  and 
these  were  silenced  by  the  increase  in  earnings. 

Since  reorganization  the  Baltimore  &  Ohio  has  been  enjoying 
great  prosperity.  On  a  mileage  operated,  which  was  some  1800 
miles  greater  in  1907  than  in  ipoo,2  it  earned  a  return  increased 
by  over  $40,000,000 ;  while  its  income  from  dividends  and  interest 
mounted  from  less  than  half  a  million  to  over  $3,000,000.  Ton 
mileage  figures  were  about  11,300,000,000  in  1907  as  against 
6,800,000,000  in  1900;  passenger  mileage  had  grown  from  459,000,- 
ooo  to  723,000,000.  This  prosperity  has  but  reflected  the  condition 
of  the  country  at  large,  but  the  Baltimore  &  Ohio  has  taken  ad- 
vantage of  it  in  far-sighted  fashion.  No  less  than  $17,000,000  have 
been  spent  from  earnings  for  additions  and  improvements  between 
June  30,  1899,  and  June  30,  1907,  not  to  mention  maintenance  of 
way  expenditures  which  have  ranged  from  about  $1500  to  over 
$2500  per  mile  of  road  operated.  Besides  the  provision  made  by 
the  reorganization  plan,  $15,000,000  convertible  debentures  were 
issued  under  date  of  March  i,  1901,  for  new  construction  and 
improvements.  There  were  authorized  $40,000,000  of  common 
stock  in  November,  1901,  to  go  in  part  for  improvements,  and  the 
bulk  of  $27,750,000  new  common  stock  of  1906  will  be  applied 
to  similar  ends.  As  a  result  the  company's  equipment  has  largely 
increased,  grades  have  been  reduced,  curves  straightened,  light 

1  Ry.  Age  28:  570,  1899. 

"  The  chief  addition  has  been  that  of  the  Cleveland,  Lorraine  &  Wheeling. 


BALTIMORE  6r-  OHIO  31 

rails  replaced  by  heavy,  and  subsidiary  track  increased.  There 
were  two  miles  of  second,  third,  and  fourth  track  and  sidings  for 
every  three  miles  of  main  track  in  1900;  there  were  three  miles  to 
every  four  in  1907.  A  considerable  increase  in  average  freight  train 
load  has  accordingly  occurred.  In  1900  the  average  load  was  366 
tons;  in  1907  it  was  433.02.  That  this  figure  has  not  still  more 
greatly  increased  from  the  406.53  tons  of  1901  is  probably  due  to 
the  somewhat  greater  proportion  of  manufactures  handled  and  to 
a  considerable  decrease  in  average  distance  hauled,  and  is  com- 
pensated for  by  an  increase  of  over  one  cent  in  the  average  rate 
received. 

The  events  of  most  vital  importance  in  the  Baltimore  &  Ohio's 
recent  history  have  been  connected  with  its  control.  In  September, 
1898,  Philip  D.  Armour,  Marshall  Field,  and  Norman  D.  Ream, 
executors  of  the  Pullman  estate,  together  with  James  J.  Hill  of  the 
Great  Northern,  bought  a  large  interest  in  the  stock,  though  whether 
or  not  sufficient  to  control  no  one  knew.  From  statements  by  Mr. 
Cowen  it  would  appear  that  the  deal  was  somewhat  similar  to  the 
earlier  one  in  which  the  Northern  Pacific  had  been  interested :  that 
is,  it  involved  the  sale  of  Baltimore  &  Ohio  stock  to  secure  the  good 
will  of  men  strong  enough  to  support  the  road  in  case  of  difficulty, 
and  influential  enough  to  open  desirable  connections  or  to  modify 
the  stringency  of  competition.  "The  recent  transaction,"  said  Mr. 
Cowen,  "has  been  the  realization  of  my  hopes  about  the  future  of 
the  road."  It  was  not  Mr.  Hill's  influence,  however,  that  was 
destined  to  be  dominant.  By  the  end  of  the  year  rumors  connected 
the  Pennsylvania  with  the  purchase  of  an  interest  in  the  property, 
and  the  election  of  Mr.  S.  M.  Prevost,  third  vice-president  of  that 
company,  to  a  directorship,  gave  assurance  of  the  truth  of  the  re- 
ports. It  was,  of  course,  impossible  to  purchase  actual  control  so 
long  as  the  Baltimore  &  Ohio  stock  remained  in  trust;  but  the 
trustees  seemed  very  ready  to  accord  to  new  buyers  that  representa- 
tion and  influence  to  which  their  stock  might  give  them  claim. 
At  the  annual  election  in  November,  1 900,  an  additional  represent- 
ative of  the  Pennsylvania  was  elected  to  the  board,  showing  the 
probable  increase  of  the  Pennsylvania  holdings,  and  the  following 
year  an  absolute  majority  was  said  to  have  been  passed,  the  shares 
held  by  Mr.  Hill  and  his  associates,  and  apparently  sold  to  the 


32  RAILROAD  REORGANIZATION 

Pennsylvania,  being  thought  to  contribute  powerfully  to  that  re- 
sult.1 In  May,  Mr.  Hill  and  Mr.  Charles  H.  Tweed,  chairman  of 
the  Southern  Pacific,  resigned  from  the  directorate,  to  be  replaced 
by  two  further  representatives  of  the  Pennsylvania.  In  June,  Pre- 
sident Cowen  was  replaced  by  Mr.  S.  F.  Loree,  fourth  vice-president 
of  the  Pennsylvania  lines  west  of  Pittsburg,  and  in  August  the 
voting  trust  was  dissolved. 

The  last  step  has  been  the  sale  of  part  of  the  Pennsylvania  hold- 
ings to  the  Union  Pacific  system.  It  appears  that  the  former's 
interest  in  the  company  was  largely  due  to  anxiety  over  the  coal  situ- 
ation. Before  1895  rates  on  bituminous  coal  had  been  depressed 
and  demoralized.  Rebates  had  been  freely  given  in  spite  of  any 
agreements  which  could  be  arranged.  Under  these  circumstances 
the  Pennsylvania  had  determined  to  buy  enough  stock  of  the  Chesa- 
peake &  Ohio,  the  Baltimore  &  Ohio,  and  the  Norfolk  &  Western 
companies  to  control  the  policies  of  these  roads,  and,  through 
stock  ownership  in  the  Reading  by  the  Baltimore  &  Ohio,  to  in- 
fluence that  company  also.2  Unfortunately  for  the  project  public 
attention  became  concentrated  on  the  coal  industry  at  this  time 
because  of  the  discovery  of  certain  flagrant  abuses,  and  it  seemed 
wise  for  the  Pennsylvania  to  dispossess  itself  of  a  part  of  its  stock.3 
The  Union  Pacific  was  in  the  market  with  large  resources  derived 
from  its  sale  of  Great  Northern  and  Northern  Pacific  stock.  It 
was  out  of  the  question  for  the  Pennsylvania  to  sell  its  shares  to  a 
competitor,  but  there  was  less  objection  to  a  sale  to  Mr.  Harriman, 
providing  a  reasonable  portion  should  be  retained.  Accordingly, 
the  Pennsylvania  sold  and  the  Union  Pacific  interests  bought,  in 

1  Chron.  72: 1079,  1901.  In  February,  1906,  the  Pennsylvania  Railroad  and  three 
other  companies  which  it  controlled  owned  $28,480,000  of  Baltimore   &  Ohio  pre- 
ferred and  $42,900,000  of   Baltimore  &  Ohio  common  stock  out  of  an  authorized 
capital  of  $60,000,000  preferred  and  $125,000,000  common.  Report  of  the  Interstate 
Commerce  Commission  on  the  Pennsylvania  community  of  interest,  February  6,  1906. 

2  See  Chron.   76:  102,  1903;  and  Interstate  Commerce  Commission,  Report  on 
Discriminations  and  Monopolies  in  Coal  and  Oil,  January  25,  1907.    The  interest 
of  the  Baltimore   &  Ohio  in  the  Reading  dated  from  1902,  and  was  influenced  in 
turn  by  the  ability  of  the  Reading  to  control  the  Central  of  New  Jersey,  over  which 
the  Baltimore  &  Ohio  reached  New  York.   The  latter's  holdings  of  Reading  stock 
were  shared  with  the  Vanderbilts.   Both  the  Baltimore  &  Ohio  and  the  Lake  Shore 
sold  a  block  of  their  Reading  stock  in  1904. 

3  See  statement  by  the  Pennsylvania  management  in  Chron.  83 : 563,  1906. 


BALTIMORE  &  OHIO  33 

October,  1906,  some  $39,540,600  in  Baltimore  &  Ohio  common  and 
preferred  stock,  being  in  the  neighborhood  of  half  of  the  former's 
holdings.  This  is  the  present  situation  of  the  property.  The  Balti- 
more &  Ohio  is  independent,  in  the  sense  that  it  is  not  controlled 
by  any  single  interest,  but  large  amounts  of  its  stock  are  owned  by 
its  competitor,  the  Pennsylvania,  and  by  its  connection,  the  Ham- 
man  system.  On  the  whole  the  alliance  with  these  interests  augurs 
well  for  the  future  of  the  company.1 

1  It  is  not  necessary  to  do  more  than  to  mention  the  recent  contest  between  the 
Baltimore  &  Ohio  and  the  Hill-Morgan  people  over  the  Chicago  Terminal  Transfer 
Railway.  By  arrangement  with  this  company  the  Baltimore  &  Ohio  had  enjoyed 
terminal  facilities  at  Chicago  on  favorable  terms.  When  the  Terminal  Railway 
went  bankrupt  the  Baltimore  &  Ohio  paid  off  the  first  mortgage  bonds  in  order  to 
prevent  the  loss  of  its  privileges.  Litigation  followed,  to  end  finally  in  an  agreement 
between  the  Hill  and  Baltimore  &  Ohio  interests  for  joint  ownership  of  the  Chicago 
Terminal  by  the  Burlington  and  the  latter,  and  for  the  use  of  its  facilities  in  accordance 
with  an  equitable  division  of  its  trackage.  The  Pere  Marquette  and  the  Chicago 
Great  Western,  which  had  shared  in  the  use  of  the  property 'to  that  time,  were  left 
to  shift  for  themselves.  Ry.  World,  August  23,  1907. 


CHAPTER  II 
ERIE 

Early  history  —  Reorganization  —  Wall  Street  struggles  —  Financial  difficulties  — 
Second  reorganization  —  Development  of  coal  business  —  Extension  to  Chicago 
—  Grant  &  Ward  —  Financial  readjustment  —  New  York,  Pennsylvania  &  Ohio  — 
Third  reorganization  —  Later  history. 

THE  New  York  &  Erie  Railroad  was  organized  in  1833  in  the 
hope  of  bringing  to  the  southern  tier  of  counties  in  New  York  State 
a  prosperity  equal  to  that  which  the  Erie  Canal  had  secured  for 
the  northern  tier.  It  was  to  run  from  New  York  or  some  suitable 
point  in  its  vicinity  to  Lake  Erie.  A  six  foot  gauge  was  adopted, 
partly  because  the  grades  encountered  were  thought  to  require 
locomotives  with  more  power  than  a  narrower  gauge  could  accommo- 
date, and  partly  because  it  was  wished  to  make  the  road  independent 
of  any  connection  which  might  lead  trade  away  from  the  city  of 
New  York.1 

The  events  of  the  early  years  may  be  briefly  dealt  with.  Diffi- 
culty was  experienced  in  getting  subscriptions,  and  in  1836  the 
legislature  granted  a  loan  of  $3,000,000.  An  assignment  was  made 
in  1842,  due  to  the  difficulty  of  getting  the  enterprise  under  way, 
which  resulted  in  the  release  of  the  company  from  liability  to  the 
state  on  condition  that  it  complete  its  line  from  the  Hudson  to  Lake 
Erie  by  1851.  Stockholders  were  to  exchange  two  shares  of  old  for 
one  share  of  new  stock,  and  a  first  mortgage  of  $3,000,000  was 
authorized.2  In  1851  the  line  was  completed  to  Dunkirk  on  Lake 
Erie,  and  the  following  year  it  reported  a  bonded  indebtedness  of 
$14,000,000,  capital  stock  of  $6,000,000,  and  floating  debt  to  the 
amount  of  $3,080,000,  or  a  total  of  $43,961  per  mile  of  line;  a  high 
figure,  but  probably  necessarily  so  in  view  of  the  difficult  work  to 
be  performed.  Although  nominally  completed,  the  troubles  of  the 
road  were  not  over;  and  a  precarious  existence  was  maintained 
only  by  the  placing  of  additional  loans  in  1852  and  1855,  and  by  the 
aid  of  Daniel  Drew  on  two  distinct  occasions.  A  war  of  rates  with 

1  E.  H.  Mott,  Between  the  Ocean  and  the  Lakes  —  the  Story  of  Erie.  N.  Y.  1899. 
a  Ibid.  pp.  79-80. 


ERIE  35 

the  New  York  Central  aggravated  the  situation ;  heavy  storms  and 
ice  floods  in  January,  1857,  caused  serious  loss,  and  the  panic  of 
that  year,  with  the  ensuing  depression,  proved  more  than  the  road 
could  stand.  Proceedings  were  begun  in  1859  by  the  trustees  of 
the  fourth  mortgage,  and  in  August  a  receiver  was  appointed.1 
The  wonder  was  that  such  action  had  been  delayed  so  long.  The 
income  of  the  road  had  been  so  far  short  of  meeting  current  expenses 
that  claims  for  labor,  supplies,  rents,  and  unpaid  taxes,  and  judg- 
ments rendered  against  the  company  before  the  receivers  were 
appointed,  had  mounted  up  to  $741,510;  while  not  only  had  in- 
terest on  three  mortgages  fallen  due  in  April,  May,  and  June,  but 
the  principal  of  the  second  mortgage,  amounting  to  $4,000,000, 
had  matured.  The  settlement  of  claims  and  the  reorganization  of  the 
company  were  put  in  the  hands  of  J.  C.  Bancroft  Davis  and  Dudley 
S.  Gregory.  Since  the  earnings  of  the  road  were  at  so  low  an  ebb, 
wisdom  would  have  seemed  to  dictate  some  scaling  of  the  charges 
to  correspond.  This  did  not  enter  into  the  views  of  the  trustees; 
instead,  they  proposed  to  give  preferred  stock  for  all  unsecured  in- 
debtedness, to  extend  the  principal  of  the  second  mortgage  coming 
due,  to  exchange  old  common  stock  for  new,  to  levy  an  assessment 
of  2  J  per  cent  on  both  classes  of  new  stock,  and  with  the  proceeds 
of  the  assessment  to  pay  all  coupons  in  arrears.  Provision  was  made 
for  the  retirement  of  certain  fourth  mortgage  bonds,  and  for  a  sale 
under  foreclosure  of  that  mortgage.  By  the  arrangement  no  saving 
in  fixed  charges  worth  mentioning  was  secured;  no  sacrifice  was 
demanded  of  bondholders ;  and,  save  for  the  payment  of  assessments 
and  the  (new)  stock  given  for  floating  debt,  the  stockholder's  posi- 
tion was  not  made  worse.  The  scheme  was  an  easy  and  temporary- 
means  of  escape  from  an  embarrassing  position.  Before  the  reor- 
ganization the  bonds  outstanding  had  amounted  to  $18,006,000,  the 
stock  to  $11,000,000,  and  the  unsecured  indebtedness  to  $8,504,000. 
After  reorganization  the  totals  were:  indebtedness,  $17,953,000, 
and  stock,  $19,911,000  (of  which  $8,911,000  preferred);  or  a  capital- 
ization of  $67,728  per  mile.  The  road  was  sold  in  1862,  and  the 
Erie  Railway  took  the  place  of  the  original  New  York  &  Erie  Rail- 
road Company. 
With  1864  began  the  career  of  the  Erie  as  a  speculative  Wall 

1  Mott,  p.  1 29.  Default  was  also  made  on  the  first,  second,  third,  and  fifth  mortgages. 


36  RAILROAD  REORGANIZATION 

Street  stock.  Its  large  capitalization  and  the  painful  slowness  with 
which  its  earnings  grew  kept  the  quotations  of  its  shares  normally 
at  a  low  figure  and  invited  speculation;  while  the  location  of  its 
lines  tempted  more  serious  efforts  to  obtain  control.  Up  to  1867 
Daniel  Drew  was  in  power,  while  Commodore  Vanderbilt  spent  his 
best  efforts  to  drive  him  out ;  after  that  date  Jay  Gould  and  Jim  Fisk 
became  more  and  more  prominent,  and  manipulated  the  Erie  se- 
curities with  enthusiastic  regard  to  profits  which  they  might  derive 
both  from  the  Erie  Company  itself  and  from  operators  who  wished 
to  speculate  in  its  stock.  In  the  course  of  the  abundant  litigation 
to  which  Gould's  methods  gave  rise,  various  receivers  were  ap- 
pointed ;  but  the  orders  of  appointment  were  subsequently  vacated, 
and  the  receiverships  were  nominal  only.  The  details  of  the  Wall 
Street  struggles  have  little  interest  for  us  here.1  But  the  result  is  of 
importance.  In  the  eight  years  from  1864  to  1872,  when  Gould 
was  turned  out  of  Erie  by  General  Sickles  and  his  English  backers, 
the  bonded  indebtedness  of  the  company  increased  from  $17,822,- 
900  to  $26,395,000,  and  the  common  stock  from  $24,228,800  to 
$78,000,000 ;  in  the  one  case  a  growth  of  48  per  cent  and  in  the  other 
of  221  per  cent,  at  a  time  when  the  mileage  increased  53  per  cent 
and  the  net  earnings  but  22  per  cent.2  No  more  disgraceful  record 
exists  for  any  American  railroad.  The  stock  was  not  issued  for  the 
sake  of  improving  the  road,  and  it  was  subsequently  shown  that 
the  road  was  not  improved ;  but  it  was  thrown  upon  the  market  at 
critical  times  in  support  of  bear  operations  by  the  Erie  managers, 
while  portions  of  it,  on  at  least  one  occasion,  were  bought  back  with 
the  funds  of  the  company  to  aid  speculation  for  a  rise.  The  result 
was  to  ruin  the  credit  of  the  Erie,  and  to  make  it  the  favorite  tool 
of  cliques  of  gamblers.  The  increase  in  bonds  occasioned  an  un- 
mistakable increase  in  fixed  charges,  which  rose  from  20  per  cent 
of  gross  earnings  in  1864  to  25  per  cent  in  1871,  21  per  cent  in  1872, 
and  30  per  cent  in  1873,  while  the  purchase  of  worthless  bonds  of 
subsidiary  roads,  such  as  the  Boston,  Hartford  &  Erie,  lessened 
the  assets  without  disclosing  the  real  position  to  the  casual  observer. 
In  1872  the  control  of  Erie  was  taken  from  Gould  through  a 
vigorous  campaign  managed  by  General  Daniel  E.  Sickles,  and  an 

1  See  Adams's  Chapters  of  Erie,  Boston,  1871. 

3  The  capital  per  mile  rose  from  $81,068  in  1864  to  $117,760  in  1872. 


ERIE  37 

"eminently  respectable"  board  of  directors  was  elected.  T<*m- 
porary  relief  was  obtained  from  the  use  of  $6,000,000,  available 
from  an  issue  of  bonds  previously  approved , 1  and  dividends,  first 
on  the  preferred  and  then  on  both  preferred  and  common  stock 
were  declared.  Unfortunately  the  dividends  were  not  earned ;  and 
this  fact,  which  was  suspected  from  the  previous  record  of  the  com- 
pany and  the  marvel  of  its  so  early  restoration  to  a  dividend  basis, 
was  shown  in  the  statements  of  ex-Auditor  S.  H.  Dunan,  who  re- 
signed in  March,  1874,  alleging  that  the  accounts  had  been  falsified 
to  suit  the  company's  purposes,  and  that  he  was  unwilling  any 
longer  to  be  a  party  thereto.2  Investigations  conducted  by  represent- 
atives of  English  bondholders  showred  that  in  the  three  years  ending 
in  September,  1875,  the  profits  of  the  road  had  been  $1,008,775 
instead  of  $5,352,673  as  stated  hi  the  company's  accounts;  and  the 
severity  of  this  finding  was  scarcely  mitigated  by  the  conclusion  that 
in  the  opinion  of  the  committee  the  dividends  on  the  preferred 
stock  at  least  were  justified  by  the  books.3  At  the  same  time  the 
report  of  Captain  Tyler,  another  English  representative,  laid  em- 
phasis on  the  necessity  for  a  change  of  gauge,  a  double  track,  im- 
provements in  gradient,  fresh  extensions  and  connections,  and  other 
similar  matters.  ' 

The  Yeal  position  of  the  company  at  the  time  was  shown  but  too 
well  by  the  frequency  of  strikes  upon  its  road.  Thus  in  February, 
1874,  a  strike  of  freight  brakemen  on  the  Susquehanna  division  broke 
out,  caused  principally  by  an  order  to  discharge  one  of  the  brake- 
men  from  each  freight  crew,  leaving  only  three  on  a  tram ;  and  at 
the  same  time  there  was  a  strike  of  the  switchmen  on  some  of  the 
divisions  owing  to  a  decrease  in  pay.  In  March  occurred  a  serious 
strike  among  the  employees  of  the  road  in  Buffalo,  mainly  on  account 
of  irregularity  and  delay  in  payment  of  wages,  and,  finally,  in  April, 
there  was  trouble  both  in  the  Susquehanna  shops  and  in  the  Jersey 
City  freight  yard  over  this  same  cause.  The  indications  afforded  by 
these  troubles  were  borne  out  by  the  figures  of  the  annual  reports. 
The  gross  earnings  of  1874  were  $1,413,708  less  than  those  of  1873, 

1  Chron.  12:203,  1871;  Ibid.  16:489,  1873. 

2  R.  R.  Gaz.  6:  too,  1874.  See  affidavit  of  S.  H.  Dunan  in  the  suit  of  John  C.  Angell 
against  the  Erie  Railway  Company  and  others,  reprinted   in   Hepburn  Committee 
Report,  vol.  2,  Exhibits,  pp.  591-610. 

3  Hepburn  Committee  Report,  vol.  2,  Exhibits,  pp.  623-643. 


38  RAILROAD  REORGANIZATION 

while  the  decrease  in  operating  expenses  was  so  slight  as  to  reduce 
net  earnings  by  nearly  the  same  amount.  If,  now,  there  is  deducted 
from  the  net  earnings  of  the  years  1871-3,  inclusive,  the  sum  which 
the  London  accountants  declared  to  have  been  improperly  reported 
as  profits,  there  results  an  average  of  $4,175,699  net ;  or  less  than  the 
net  earnings  for  either  1864,  1865,  or  1866,  although  the  average 
charges  for  the  years  mentioned  exceeded  the  average  of  the  earlier 
period  by  $1,769,060  each  year.  These  figures  exclude  the  influence 
of  the  panic  of  1873,  which,  as  has  been  seen,  caused  a  still  further 
falling  off  in  the  earnings  of  the  company.  It  was  a  time,  moreover, 
when  the  Erie  could  not  be  content  to  sit  still  and  wait,  for  com- 
petition was  daily  becoming  more  severe.  By  1874  the  Baltimore 
&  Ohio,  the  New  York  Central,  and  the  Pennsylvania  had  con- 
nections with  Chicago,  and  the  Erie  was  competing  with  them  for 
business  by  means  of  traffic  agreements  with  connecting  lines. 
The  next  decade  was  to  see  the  bitterest  rate  wars  that  the  country 
has  ever  known ;  and  the  Erie,  with  its  exceptional  gauge  and  single 
track,  was  to  compete  with  rivals  of  normal  gauge,  who  were  adding 
third  and  fourth  tracks  to  the  two  which  they  already  possessed. 
The  one  bright  spot  was  the  development  of  the  coal  traffic,  which 
in  1874  formed  the  greatest  item  of  the  Erie's  tonnage,  and  was  in 
a  measure  apart  from  the  competition  of  other  lines. 

Suit  was  brought  in  July,  1874,  for  the  appointment  of  a  receiver. 
The  complaint  reviewed  alleged  improper  acts  of  the  management 
in  declaring  dividends,  in  buying  Buffalo,  New  York  &  Erie 
stock  and  sundry  coal  lands,  and  in  issuing  the  new  $30,000,000 
mortgage  before  mentioned.1  In  October  the  Attorney- General  of 
New  York  instituted  suit  on  nominally  the  same  grounds;  not, 
as  he  explained,  in  the  expectation  that  the  appointment  of  a  receiver 
would  be  required,  but  in  order  that  this  action  might  be  taken  if 
the  conduct  of  the  directors  should  make  it  necessary.  Still  other 
suits  were  begun  before  the  year  was  out. 

Meanwhile  the  management  was  changed.  Whether  or  not  Mr. 
Watson,  who  had  been  president  since  1872,  had  done  all  humanly 
possible  to  set  the  Erie  on  its  feet,  his  administration  was  not 
unnaturally  in  bad  odor  after  the  charges  of  Dunan  and  the  report 
of  the  London  accountants,  to  say  nothing  of  the  admittedly  low 

1  Angell  suit,  R.  R.  Gaz.  6:  269,  1874. 


ERIE  39 

earnings  for  the  year  1874.  An  attempt  was  made  to  secure  the 
very  best  man  possible  for  the  presidency,  and  to  support  him  in 
necessary  reforms,  in  the  hope  of  some  different  results  from 
those  with  which  securityholders  had  become  familiar.  The  man 
for  the  place  was  thought  to  be  Mr.  H.  J.  Jewett,  a  railroad  man 
then  hi  Congress  from  Ohio;  and  this  gentleman  was  accordingly 
secured  at  an  extremely  liberal  salary.  Soon  after  his  election  a  ten 
per  cent  cut  in  salaries  was  decreed,  and  an  examination  of  the 
accounts  of  the  stations  along  the  line  hi  behalf  of  the  company 
was  begun.  It  was  too  late,  however,  for  the  company.  The  busi- 
ness of  the  last  of  1874  and  first  of  1875  was  poor;  floods  in  the 
spring  damaged  the  property  of  the  road,  and  rumors  of  a  receiv- 
ership were  rife.  On  May  22  a  private  meeting  of  stockholders 
in  New  York  passed  resolutions  to  the  effect  that  the  borrowing  of 
money  by  the  sale  of  7  per  cent  bonds  at  40  cents  on  the  dollar, 
and  other  means  adopted  by  the  Watson  administration,  would  in- 
evitably result  in  bankruptcy ;  that  sound  interest  required  that  the 
money  needed  to  pay  interest  should  be  raised  by  an  assessment 
on  the  stockholders,  and  that  the  directors  should  be  thereby 
requested  to  open  books  to  examination,  and  to  invite  stockholders 
to  contribute  voluntarily  a  sum  sufficient  to  keep  the  company  from 
immediate  failure.1  The  proposal  showed  a  proper  spirit,  but  was 
impracticable.  Four  days  later  Mr.  Jewett  was  appointed  receiver 
on  application  of  representatives  of  the  Attorney- General  and  of  the 
Railroad.2 

This  was  the  second  receivership  which  the  Erie  had  had  to  face, 
and  the  situation  was  materially  worse  than  at  the  previous,  failure. 
According  to  the  statement  of  President  Jewett  the  funded  indebted- 
ness in  May,  1875,  amounted  to  $54,394,100,  and  the  fixed  charges 
to  $5,059,828 ;  while  the  net  earnings  for  the  previous  nine  months 
had  decreased  13.4  per  cent  from  the  corresponding  period  for  the 
previous  year,  .and  a  serious  deficit  was  in  view.  Temporary  meas- 
ures of  relief  had  served  but  to  drag  the  company  further  into  the 
mire ; 3  and,  most  important  of  all,  the  causes  for  the  existing  diffi- 

1  R.  R.  Gaz.  7:224,  1875. 

2  Chron.  20:520,  1875. 

3  From  a  loan  of  £3,000,000  placed  in  London,  the  company  had  received  but 
£1,232,029  in  cash;   £508,431  being  retained  by  the  London  Banking  Association 
and  by  James  McHenry  for  claims  and  commissions  on  which  the  critical  condition 


40  RAILROAD  REORGANIZATION 

culties  were  of  a  permanent  nature,  so  that  the  future  gave  promise  of 
still  harder  conditions  than  had  existed  in  the  past.  What  was  needed 
was  a  reorganization  which  should  undo  the  evil  work  of  Gould, 
Fisk,  Drew,  and  their  associates,  and  which  should  secure  the  margin 
of  surplus  earnings  which  the  reorganization  of  1859-62  had  failed 
to  provide.  Perhaps  the  chief  difficulty  lay  in  the  fact  that  the  men 
who  were  responsible  for  the  increased  capitalization  were  not  at  all 
those  on  whom  the  brunt  of  reconstruction  would  fall ;  for  while  the 
managers  of  the  road  had  been  Americans,  the  gullible  investors  had 
been  Englishmen ;  and  it  was  reported  that  much  of  the  watered  stock 
of  the  Gould  regime  had  been  unloaded  on  the  English  market. 

Committees  sprang  up  promptly.  The  most  important  of  them 
were  the  English  committees  of  bond-  and  stockholders,  soon 
consolidated  under  the  chairmanship  of  Sir  Edward  Watkin.  •  On 
August  7,  Sir  Edward  left  England  on  a  visit  of  inspection,  accom- 
panied by  Mr.  Morris,  counsel  for  the  bondholders.  Conference  with 
the  board  of  directors  and  with  President  Jewett  followed,  and  a 
provisional  scheme  of  adjustment  was  decided  upon.  In  his  report 
to  his  English  constituents  Sir  Edward  outlined  the  results.  Current 
indebtedness,  said  he,  was  $42,180,075;  estimated  net  revenues  for 
the  year  ending  in  June  last  were  $3,715,609;  operating  expenses 
had  been  for  that  year  79  per  cent,  due  largely  to  the  cost  imposed 
by  exceptional  gauge,  while  the  chief  lines  with  which  the  Erie  com- 
peted showed  proportions  of  only  from  60  to  66  per  cent.  Out 
of  fourteen  branches  only  three  showed  a  profit  above  rentals,  and 
pay-rolls  had  ordinarily  been  months  in  arrears.  These  facts  were 
familiar ;  the  remedy  proposed  was  unfortunately  familiar  as  well. 
"Let  it  be  hoped,"  said  this  English  financier,  "that  the  bond-  and 
stockholders  will  have  the  courage  now  to  submit  to  a  period  of 
self-denial,  and  will  consent  to  pay  their  debts  and  complete  essen- 
tial obligations  out  of  available  net  profits,  the  bondholders  re- 
ceiving in  place  of  cash  such  equitable  obligations,  realized  out  of 
surplus  revenue  in  the  future,  as  each,  according  to  right  of  priority, 
may  justly  expect."  *  What  could  this  have  meant  save  an  issue  of 
stock  or  income  bonds  for  coupons  falling  due,  with  the  result  of 

of  the  company  enabled  them  to  insist.    Chron.  20:  500,  1875.    For  statement  of  the 
physical  condition  of  the  property,  May  26,  1875,  see  Extracts  from  joint  letter  to 
Hon.  H.  J.  Jewett,  Hepburn  Committee  Report,  vol.  2,  pp.  517-518,  Exhibits. 
1  See  R.  R.  Gaz.  7:423,  1875. 


ERIE  41 

adding  to  the  unwieldy  capitalization  of  the  road  instead  of  reduc- 
ing it  as  should  have  been  done !  For  the  rest,  Sir  Edward  Watkin 
concluded  with  Mr.  Jewett  the  following  arrangement : 

(1)  Three  nominees  of  the  bond-  and  stockholders'  committee 
proposed  by  Watkin  were  to  take  seats  in  the  Erie  board ; 

(2)  Mr.  Morris  was  to  be  associated  with  counsel  for  the  receiver 
and  for  the  company,  and  was  to  be  regarded  and  treated  as  one  of 
the  professional  agents  and  officers  of  the  undertaking; 

(3)  Mr.  Jewett  was  to  transmit  a  memorandum  of  his  views  on 
reorganization ; 

(4)  Net  earnings  were  to  be  retained  for  a  while,  and  bondholders 
were  to  have  a  voice  in  their  expenditure.   Thus  a  vote  was  to  be 
taken  under  the  charge  of  the  stock-  and  bondholders'  committee  in 
London  on  the  constitution  of  a  committee  of  consultation,  consist- 
ing of  representatives  of  each  class  of  bondholders  and  of  preferred 
and  ordinary  stock,  and  that  committee  was  to  designate  a  special 
representative  whose  consent  and  approval  were  to  be  taken  by  Mr. 
Jewett  in  the  expenditure  of  net  earnings; 

(5)  Monthly  reports  of  actual  earnings  and  expenditures,  to- 
gether with  reports  from  the  president  and  receiver,  were  to  be  regu- 
larly transmitted  to  the  office  of  the  committee  in  London ; 

(6)  Bond-  and  stockholders  were  to  be  urged  to  give  power  of  attor- 
ney and  proxies  to  Watkin,  or  to  such  other  person  or  persons  as  the 
above  representatives  of  the  bond-  and  stockholders  should  designate ; 

(7)  Any  scheme  of  reorganization  was  to  include  a  provision  giving 
bondholders  a  voting  power. 

On  the  above  resolutions  Jewett,  with  his  board,  and  Watkin,  with 
his  committee,  agreed  to  cooperate.1  Under  the  circumstances  the 
increased  power  given  the  bondholders  was  both  a  natural  and  a  just 
demand,  and  it  is  probable  that  Mr.  Jewett's  prompt  acquiescence 
in  it  had  something  to  do  with  Sir  Edward's  advice  to  the  security- 
holders  "to  rely  on  the  honor,  as  I  feel  you  may  also  upon  the  anx- 
ious labors  and  full  experience  of  the  President  and  Receiver." 

The  report  did  not  go  uncriticised.  It  was  pointed  out,  first,  that 
a  majority  of  English  proprietors  could  not  unhesitatingly  share  the 
confidence  expressed  in  Mr.  Jewett ;  second,  that  the  first  mortgage 
bondholders  were  well  secured,  and  would  surely  refuse  to  fund 

1  R.  R.  Gaz.  7:423,  1875. 


42  RAILROAD  REORGANIZATION 

their  indebtedness ;  and  third,  that  the  payment  of  the  floating  debt, 
according  to  the  Watkin  plan,  would  simply  create  another  debt 
of  equal  or  greater  amount  due  to  the  bondholders  whose  coupons 
were  not  paid.  The  only  sound  way,  said  a  committee  of  bond- 
holders in  Dundee  in  a  letter  to  the  Watkin  Committee,  is  resolutely 
to  shun  an  accumulation  of  mortgage  liabilities  on  the  one  hand,  and 
on  the  other  to  give  increased  reality  to  the  bonds  and  stocks  of  the 
company  already  existing  as  items  in  capital  account,  i.  e.  an  assess- 
ment on  the  stock  and  a  sweeping  reduction  in  the  interest  on  the 
bonds  secured  by  the  second  mortgage: — the  first  mortgage  bonds 
are  in  different  case  —  they  represent  investment  of  cash  instead  of 
mere  water,  and  even  if  foreclosure  is  difficult,  they  have  beyond 
question  an  absolutely  good  security  for  the  ultimate  payment  of 
both  principal  and  interest.1 

In  September,  1875,  a  plan  of  reorganization  was  anonymously 
put  forward  as  follows :  Instead  of  assessment  on  the  shareholders, 
it  suggested  the  issue  of  50  per  cent  more  common  stock ;  one  new 
share  for  every  two  shares  then  existing.  If  a  price  of  $25  per 
share  could  be  obtained  a  total  of  $10,000,000  cash  would  be 
thereby  secured.  Besides  the  new  stock  issued  bond-  and  preference- 
holders  were  to  capitalize  their  interest  for  two  years  in  bonds  or 
shares  bearing  their  present  priorities.  This  funding  should  yield 
$8,000,000;  and  the  $18,000,000  in  all  obtained  was  to  be  expended 
on  the  road  over  the  next  two  years,  during  which  period  the  new 
shares  were  to  be  paid  up  by  half-yearly  instalments.  With  the  line 
furnished  and  equipped  as  proposed,  continued  this  optimistic  plan, 
the  working  expenses  could  be  reduced  from  79  per  cent  to  60  per 
cent,  and  the  traffic  within  three  years  would  be  at  least  $24,000,000 
per  year,  affording  a  net  revenue  of  $9,600,000  per  annum,  suffi- 
cient to  meet  all  bond  and  preference  liabilities  and  to  leave  3  per  cent 
for  the  ordinary  charges.2  The  all  sufficient  criticism  to  this  plan  was 
that  it  required  too  great  a  combination  of  favorable  circumstances 
to  ensure  its  success.  In  some  respects,  however,  it  was  not  unlike  the 
plan  ultimately  adopted. 

Two  months  later  appeared  a  plan  by  Mr.  John  C.  Conybeare, 
an  English  bondholder,  which  was  superior  to  the  foregoing  in  that 
it  proposed  an  assessment,  and  made  some  slight  provision  for  an 

1  R.  R.  Gaz.  7:  479-80,  1875.  *  Chron.  21:  277,  1875. 


ERIE  43 

ultimate  reduction  in  fixed  charges.  Mr.  Conybeare  proposed  to 
assess  preferred  stock  $11  and  common  stock  $9.  Payment  of  the 
assessment  was  not  to  be  compulsory,  but  was  to  have  the  effect  of 
giving  to  the  stock  which  did  pay  a  right  to  dividends  before  any- 
thing should  be  received  by  that  which  did  not  pay.  Shares  of  the 
company  by  the  plan  would  thus  have  ranked  as  follows : 

(1)  Preferred  shares  on  which  assessment  had  been  paid,  entitled 
to  7  per  cent  dividends  before  any  other  dividends  were  paid. 

(2)  Preferred  shares  on  which  no  assessment  had  been  paid,  with 
rights  inferior  to  the  preferred  A  shares,  but  superior  to  the  common 
shares. 

(3)  Common  stock  on  which  assessment  had  been  paid,  entitled 
to  4  per  cent  before  further  dividend  on  the  common. 

(4)  Unprivileged,  unassessed  common  stock  which  was  to  take  what 
there  was  left. 

In  addition  there  was  to  be  a  pre-preference  8  per  cent  stock, 
ranking  before  all  the  above,  which  was  to  be  issued  to  exchange  in 
part  for  second  preferred  and  convertible  bonds.  First  consolidated 
bonds  and  sterling  bonds  of  1865  were  to  accept  one  or  two  per  cent 
of  their  7  per  cent  interest  in  bonds,  secured  perhaps  by  the  coal 
property  of  the  company,  while  the  second  consolidated  and  the 
convertible  gold  bonds  were  to  receive  4  per  cent  in  gold  and  3  per 
cent  in  the  new  pre-preference  stock  as  above.  To  the  obvious 
possibility  that  the  stockholders  would  refuse  to  pay  an  assessment 
the  plan  opposed  no  remedy.  In  this  case  the  very  moderate  amount 
of  interest  funded  would  have  been  the  only  relief  secured.1 

These  plans  were,  however,  but  preliminary  to  the  elaborate 
Watkin  scheme  which  appeared  in  December.  The  most  pro- 
minent feature  herein  was,  as  previously  indicated,  the  funding  of 
coupons,  both  those  past  due  and  those  to  become  due  for  a  time 
into  the  future.  Given  net  earnings  sufficient  to  meet  fixed  charges, 
the  postponement  of  interest  by  this  plan  would  obviously  have 
released  revenue  with  which  to  make  needed  improvements  on  the 
road.  This  funding  was  to  be,  however,  limited  to  the  first  consoli- 
dated 75,  convertible  sterling  6s,  second  consolidated  75,  and  con- 
vertible gold  75;  the  six  earlier  issues  were  to  be  left  untouched. 
One  permanent  reduction  was  also  to  be  made,  in  that  for  the  second 

1  R.  R.  Gaz.  7:511,  1875. 


44  RAILROAD  REORGANIZATION 

mortgage  and  convertible  75  were  to  be  given  two  classes  of  ninety- 
year  gold  bonds :  the  first  for  60  per  cent  of  the  principal,  with  in- 
terest at  6  per  cent,  and  payable  in  bonds  of  the  same  class  from 
the  dates  of  default  until  March,  1877,  and  thereafter  hi  gold;  the 
second  for  40  per  cent  of  the  principal,  carrying  4  per  cent  until 
1 88 1  and  thereafter  5  per  cent,  payable  only  out  of  net  earnings. 
To  start  the  company  on  its  way  and  to  meet  present  obligations  an 
assessment  was  proposed  of  three  dollars  on  the  preferred  and  six 
dollars  on  the  common  stock,  in  return  for  which  5  per  cent  income 
bonds  were  to  be  given ;  while  finally  the  dividends  on  the  preferred 
stock  were  to  be  reduced  from  7  to  6  per  cent,  and  foreclosure  was 
contemplated,  so  that  the  opposition  of  an  irreconcilable  minority 
might  be  more  easily  overcome.1  According  to  the  figures  in  the 
Watkin  plan,  the  old  and  new  capitalization  and  interest  compared 
as  follows: 
The  amount  of  capital  stock  was  unchanged. 

Total  bonded  indebtedness  Principal  Interest 

Before  reorganization,  $54,394,100  $4,073,106 

After  reorganization,  61,330,241  4,139,240 

Increase  $6,936,141  $66,134 

Indebtedness  on  which  interest  was  obligatory : 

Principal  Interest 

Before  reorganization,  $54,394,100  $4,073,106 

After  reorganization,  46,634,134  3,316,238 

Decrease  $7>759>966  $756>868 

The  net  earnings  for  1874-5  had  been  $3,715,609,  and  those  from 
1871-3  inclusive,  with  the  deductions  declared  proper  in  the  report 
of  the  London  accountants,  had  averaged  $4,175,699  each  year, 
so  that  a  safe  margin  seemed  to  intervene.  The  extent  of  the  margin 
depended,  however,  on  the  fixed  charges,  such  as  rentals,  over  and 
above  interest  on  the  funded  debt ;  and  although  it  was  proposed  to 
cancel  burdensome  leases  and  contracts  the  actual  leeway  after  1880 
was  to  be  very  small  indeed.  To  speak  briefly,  the  plan  was  definite 
but  not  sufficiently  radical  to  meet  conditions  which  were  likely  to 
arise.  In  counting  upon  the  ability  of  the  company  to  spare  con- 
siderable sums  from  revenue  for  improvements  during  the  next 
few  years,  it  was  leaning  on  a  broken  reed ;  in  increasing  the  nominal 

1  R.R.  Gaz.  7:533,  1875;  Chron.  21:612,  1875. 


ERIE  45 

amount  of  bonded  indebtedness,  it  was  making  a  step  in  the  ^ 


direction  ;  and  by  interposing  additional  claims  on  earnings  while 
leaving  the  volume  of  stock  the  same,  it  took  from  the  stockholders 
any  very  lively  interest  in  the  road's  future  welfare.  The  plan  was 
nevertheless  accepted  by  the  English  securityholders,  subject  to  such 
modifications  as  might  afterwards  be  found  desirable.  l 

The  next  step  was  to  obtain  the  unanimous  acceptance  of  this 
Watkin  scheme.  Messrs.  Robert  Fleming  and  O.  G.  Miller  were 
accordingly  sent  to  New  York  hi  February,  1876,  to  consult  with  the 
officers  of  the  company  and  the  securityholders  in  America.  No  very 
vigorous  interest  was  taken  on  this  side,  but  the  Erie  directors  ap- 
pointed a  committee  to  confer  with  the  English  representatives,  and 
discussions  took  place  for  something  over  a  month.  The  committee 
criticised  the  plan  proposed  from  the  point  of  view  of  the  stock- 
holders ;  they  maintained  that  it  would  destroy  all  their  interest  in  the 
property  unless  they  made  further  sacrifices,  which  they  were  unable 
to  do,  and  suggested  that  the  funding  of  from  four  to  eight  coupons 
by  the  first  consolidated,  gold  convertible,  and  second  consolidated 
bonds  was  all  that  would  be  needed  to  put  the  road  in  a  prosperous 
condition,  provide  for  steel  rails,  and  for  the  narrowing  of  the  gauge.2 
This  was  so  plainly  inadequate  that  it  is  a  matter  of  surprise  that  it 
was  entertained  by  the  English  committee  ;  and  even  they  insisted 
that  the  stockholders  agree  to  put  a  majority  of  the  $86,000,000  of 
stock  in  the  hands  of  the  bondholders  as  a  preliminary,  and  would 
do  no  more  than  lay  the  proposal  before  their  constituents. 

On  their  return  home  in  April  Messrs.  Miller  and  Fleming  stated 
that  the  essential  conditions  to  a  successful  reorganization  were  : 

(1)  An  effective  control  of  the  management  by  the  real  owners,  — 
the  bondholders; 

(2)  The  restoration  of  the  equilibrium  between  the  compulsory  in- 
terest charge  on  the  mortgage  debt  and  the  minimum  net  earnings; 

(3)  A  change  of  gauge  from  6  ft.  to  4  ft.  8J  in.3 

"The  foreclosure  scheme  of  the  committee"  (Watkin  plan), 
said  they,  "is  certainly  the  soundest  plan  and  would  doubtless  be 
preferred  by  those  shareholders  who  really  care  for  the  welfare  of 
their  property."  Then  referring  to  the  directors'  plan,  "If  it  were 
possible  to  present  to  the  bondholders  the  scheme  of  proceeding  by 

1  R.  R.  Gaz.  8:818,  1876.       2  Chron.  22:233,  l876-      3  R-  R-  Gaz-  8:I78»  l876- 


46  RAILROAD  REORGANIZATION 

amicable  arrangement  as  practicable,  and  therefore  as  presenting 
a  real  alternative  for  their  acceptance,  we  should  suggest  to  you  at 
the  same  time  to  lay  the  option  before  them.  We  feel,  however,  that 
that  scheme  can  only  be  regarded  as  such  an  alternative  when  stock- 
holders enough  have  signified  their  willingness  to  vest  their  shares 
in  trustees  on  the  footing  of  it,  and  so  secure  an  effectual  control 
to  the  bondholders  for  a  certain  period.  We  must,  therefore,  content 
ourselves  for  the  present  with  suggesting  that  the  committee  should 
proceed  with  vigor  in  the  direction  of  foreclosure,  at  the  same  time 
inviting  the  stockholders  to  signify  their  willingness  to  vest  their 
stock  in  trustees  as  above  mentioned. "  * 

The  suggestion  of  the  directors  was  the  last  alternative  plan  pro- 
posed, and  from  April,  1876,  the  only  question  was  how  to  perfect  and 
carry  through  the  Watkin  plan.  As  eventually  put  forward,  this 
differed  in  a  few  points  from  its  form  as  earlier  announced.  The 
fundamental  principle  was  still  the  funding  of  coupons  of  the  first  and 
second  consolidated  and  the  convertible  bonds.  Of  these  the  first 
consolidated  mortgage  and  sterling  6  per  cents  were  now  to  fund 
alternate  coupons  from  September  i,  1875,  to  September  i,  1879, 
instead  of  funding  all  coupons  to  March  i,  1876,  and  receiving  cash 
thereafter :  and  whereas  in  the  earlier  plan  mortgage  bonds  of  the 
same  class  had  been  given  for  funded  interest,  the  later  plan  created 
special  issues  of  funded  coupon  bonds,  secured  by  deposit  of  the 
funded  coupons,  and  bearing  the  same  interest  as  the  first  consoli- 
dated bonds  themselves.  A  more  serious  difference  appeared  in  the 
treatment  of  the  second  mortgage  and  the  gold  convertibles.  It 
will  be  remembered  that  it  had  been  proposed  in  December,  1875, 
to  exchange  these  for  two  classes  of  new  bonds,  of  which  60  per  cent 
were  to  bear  interest  at  the  rate  of  6  per  cent  and  40  per  cent  were 
to  consist  of  4  per  cent  income  bonds.  The  new  plan  did  away 
with  this  permanent  reduction  in  fixed  charges.  Instead,  the  second 
consolidated  and  convertible  gold  bonds  funded  alternate  coupons 
from  June  i,  1875,  to  December  i,  1879,  and  received  a  new  6  per 
cent  bond  for  the  principal  of  their  holdings,  and  funded  coupon 
6  per  cent  bonds  for  the  interest  thus  postponed ;  the  new  mortgage 
bonds  not  having  the  right  of  foreclosure  until  after  default  for  six 
successive  interest  periods  (3  years).  The  funded  coupon  bonds  were 

1  Chron.  22:423,  1876. 


ERIE  47 

to  be  funded  at  the  existing  rate  of  interest  on  the  second  corvsoli- 
dated  and  convertible  bonds,  i.  e.  7  per  cent,  so  that  the  reduction 
in  interest  was  compensated  for  by  the  greater  volume  of  securities 
given ;  and  both  classes  of  these  coupon  bonds  were  to  bear  lower 
interest  at  first  than  that  to  which  they  would  ultimately  attain. 
The  assessment  proposed  in  1875  was  retained  in  1876,  except  that 
stockholders  were  given  the  choice  of  paying  $6  on  common  and 
$3  on  preferred  stock  and  obtaining  therefor  income  bonds,  or  of 
paying  $4  on  common  and  $2  on  preferred  and  receiving  nothing 
but  new  stock,  dollar  for  dollar  for  their  old.1  One-half  of  the 
shares  of  the  new  company  (after  foreclosure)  were  to  be  issued  in  the 
name  of  one  or  more  sets  of  trustees,  who  were  to  hold  them  to  vote 
on  until  a  dividend  had  been  paid  on  the  preferred  stock  for  three 
consecutive  years.  Provision  was  made  for  an  issue  of  $2,500,000 
in  prior  lien  bonds,  to  take  precedence  of  the  remainder  of  the  second 
consols,  the  proceeds  to  be  applied  to  capital  requirements.  Voting 
power  was  conferred  on  the  first  and  second  consols,  funded  income 
bonds,  prior  lien  bonds,  and  income  bonds,  in  all  about  $57,000,000; 
one  vote  to  every  $100  of  bonds.2  The  property  of  the  company 
was  to  be  foreclosed  by  or  under  the  direction  of  certain  reconstruc- 
tion trustees,  for  the  choice  of  whom  careful  provisions  were  in- 
serted. 

Divested  of  all  complications,  what  this  reorganization  plan  pro- 
posed for  the  salvation  of  the  property  was  the  funding  of  the  cou- 
pons on  four  classes  of  bonds  from  1875  to  ^79 ;  the  reduction  of 
the  interest  to  be  paid  on  $25,000,000  second  consolidated  and  con- 
vertible 75  one  per  cent  per  share ;  and  the  raising  of  a  certain  amount 

1  Amounts  received  from  assessments  to  January  18,  1878,  were : 

$3  per  share  on       23,372  Preferred,        $70,116 
$2  58,095  116,190 

$6  72,982  Common,        437,892 

$4  698,095  2,792,380 

Total,  $3,416,578 

Shares  forfeited  for  non-payment,  —  Preferred,  3902 

Shares  forfeited  for  non-payment,  —  Common,  8923 

R.  R.  Gaz.  11:30,  1879.  Report  of  Pres.  Jewett,  Chron.  28:67-8,  1879.  Shares 
with  assessment  paid  sold  in  October,  1878,  at  $15  for  common  and  $30  for  pre- 
ferred. R.  R.  Gaz.  10 :  516,  1878. 

2  Chron.  23:233,  1876;  Ibid.  26:419;  Ibid.  29:358,  1879;  Hepburn  Committee 
Report,  vol.  2,  pp.  252-7,  Exhibits. 


48  RAILROAD  REORGANIZATION 

of  cash  by  assessment  upon  the  stockholders ;  while  it  dropped  the  one 
point  of  the  earlier  plan  which  might  have  given  a  key  to  the  solution 
of  the  whole  problem,  viz.  the  exchange  of  mortgage  and  income 
bonds  for  the  old  second  consolidated  in  the  ratios  respectively  of 
60  per  cent  and  of  40  per  cent.  When  we  remember  the  desperate 
straits  to  which  the  company  had  been  reduced,  the  permanent  relief 
seems  slight  enough ;  and  given  the  fact,  which  proved  but  too  true, 
that  the  net  earnings  were  to  fall  off  until  the  road  was  little  more 
than  able  to  meet  the  alternate  coupons  which  it  was  obliged  to  pay 
in  cash,  it  appears  to  have  been  nothing  at  all.  If  we  suppose  no 
changes  to  have  occurred  in  capital  account  between  1878  and  1883 
save  those  provided  for  in  the  plan  of  reorganization  itself,  a  com- 
parison of  the  two  periods  would  have  stood  as  follows: 


Before  reorganization 
Sterling  convertible  6s, 
First  consolidated  75, 
Convertible  73, 
Second  consolidated  73, 

Old  Mortgages, 
Guaranteed  bonds,  etc., 

Rentals, 


After  December  I,  1883 
Consolidated  73, 
Consolidated  6s,' 

Old  bonds, 

Guaranteed  bonds,  etc., 
Rentals, 

Total  before  reorganization 
Increase, 


Principal 
$4,457,714 
12,076,000 
10,000,000 
15,000,000 

$4i,533,7I4 

13,155,500 

6,003,360 

$60,692,574 


Principal 
$20,005,794 

33,516,666 
$53,522,460 

WSSiSoo 
6,003,360 

$72,681,320 

60,692,574 

$11,988,746 


Interest 
$267,463 

845,32° 

700,000 

1,050,000 

$2,862,783 
921,062 
449,4H 

$4,233,256 
742,226 

$4,975,482 

Interest 
$1,400,405 
2,011,000 

$3,411,405 
921,062 
449,411 
742,226 

$5,524,104 
4,975,482 
$548,622 


It  thus  appears  that  this  reorganization  plan  contemplated  an 
immediate  increase  in  the  cumbrous  capitalization  of  the  company 
to  the  amount  of  nearly  $12,000,000,  and  an  eventual  increase  in 
fixed  charges  of  over  $500,000.  It  offered  no  reasonable  assurance 
that  the  solvency  of  the  company  could  be  maintained  under  the 


ERIE  49 

average  conditions  existing  in  the  past,  and  left  no  margin  for  con- 
tingencies of  any  kind.  The  trouble  lay  in  the  unwillingness  of  bond- 
holders to  sacrifice  any  part  of  their  holdings  to  meet  difficulties 
caused  largely  by  inflation  over  which  they  had  had  no  control.  This 
reluctance  was  natural,  —  it  should  have  been  met,  however,  by 
the  realization  that  the  question  was  now  of  the  future  and  not  of 
the  past,  and  that  the  best  interests  of  the  bondholders  themselves 
demanded  a  reconstruction  sufficiently  radical  to  leave  no  doubt  of 
the  ability  of  the  new  company  to  pay  its  debts. 

The  plan  adopted,  foreclosure  was  in  order,  and  suits  which  had 
been  begun  as  early  as  1875  were  taken  up  and  pushed.  In  Novem- 
ber, 1877,  a  decree  of  foreclosure  under  the  second  consolidated 
mortgage  was  obtained,  appointing  a  referee  to  conduct  the  sale, 
and  providing  for  the  sale  of  the  road  to  representatives  of  the  bond- 
holders in  case  they  made  the  highest  bid.  The  opposition,  which  had 
not  been  able  to  prevent  the  approval  of  the  plan,  now  appeared  with 
a  multiplicity  of  suits  to  prevent  its  consummation.  In  January, 
1878,  demands  were  made  to  secure  a  re-accounting  from  the  re- 
ceiver, and  the  reopening  of  an  earlier  suit  of  the  people  against  the 
Erie  which  had  been  previously  discontinued.  On  January  18  the 
postponement  of  the  sale  to  March  25  was  obtained.  On  January  19 
a  suit  demanded  the  removal  of  Receiver  Jewett,  making  sweeping 
charges  of  fraud;  and  on  January  30,  in  still  other  proceedings, 
Mr.  Jewett  was  arrested  on  a  charge  of  perjury  for  swearing  to 
incorrect  statements  hi  the  annual  report  to  the  state  engineer ;  — 
a  culmination  as  disgraceful  as  it  was  absurd.  In  February  a  suit 
in  Orange  County,  New  York,  demanded  the  removal  of  the  re- 
ceiver, and  the  appointment  of  a  special  receiver  during  the  pendency 
of  the  action,  with  an  injunction  to  prevent  the  sale  of  the  road. 
In  March  a  petition  of  one  Isaac  Fowler,  a  stockholder,  for  per- 
mission to  examine  the  company's  books,  was  granted;  argument 
was  heard  on  the  petition  of  James  McHenry  to  intervene  in  the 
foreclosure  suits  and  further  to  postpone  the  sale;  the  application 
of  Albert  Betz  and  others  to  be  made  parties  was  granted;  and 
postponement  of  sale  to  April  24  obtained.  Last  of  all,  on  April 
23  and  24,  arguments  in  behalf  of  John  F.  Brown  and  F.  W.  Isaac- 
son were  heard,  asking  for  postponement  to  a  still  later  date.  The 
litigation  availed  nothing.  Judge  Potter  in  the  Brown  suit  held  that 


50  RAILROAD  REORGANIZATION 

the  courts  could  relieve  against  any  injustice  occasioned  by  the  sale, 
and  on  April  24  the  property  of  the  Erie  Railway  was  sold  for 
$6,000,000  under  foreclosure  of  the  second  consolidated  mortgage.1 
The  new  corporation  formed  to  take  over  the  railroad  was  called 
the  New  York,  Lake  Erie  &  Western  Railroad  Company,  and  had 
its  articles  of  incorporation  regularly  filed  at  the  office  of  the  Secre- 
tary of  State.  Mr.  Jewett  was  elected  president.  In  May  the  receiver 
was  discharged,2  and  a  new  stage  in  the  history  of  the  road  began. 

For  about  seven  years  the  Erie  was  to  be  free  from  the  necessity 
for  further  reorganization.  This  result,  unexpected  from  the  nature 
of  the  adjustment  of  1878,  was  due  to  the  vigorous  policy  of  Mr. 
Jewett,  first,  in  developing  the  coal  traffic  for  which  the  Erie  was 
well  located ;  second,  in  improving  the  condition  of  the  road ;  and 
third,  hi  securing  connections  with  Chicago. 

For  some  time  the  Erie  had  been  a  considerable  carrier  of  coal 
and  a  large  owner  of  coal  lands  as  well.  In  1877,  the  first  year  in 
which  the  figures  were  separated  in  the  annual  report,  roughly 
273,000,000  out  of  1,113,000,000  ton  miles  reported,  or  something 
over  one-quarter,  were  due  to  the  carriage  of  coal;  and  $2,697,776 
out  of  a  total  of  $10,647,807  of  the  freight  earnings  came  from  that 
business.  The  lands  owned  by  the  company  consisted  of  8000  acres 
in  fee,  and  large  tracts  in  leasehold  and  mining  rights  in  the  anthra- 
cite territory  in  the  northeast  corner  of  Pennsylvania ;  together  with 
14,000  acres  in  fee  and  13,000  acres  of  mining  rights  in  the  bitum- 
inous territory  in  the  northwest  portion  of  the  state.3  Mr.  Jewett  felt 
that  this  property  could  be  made  of  great  value  to  the  road,  and  it 
was  under  his  administration  as  receiver  that  steps  were  taken  to 
extend  the  holdings  of  bituminous  land,  and  to  control  branch  roads 
leading  into  the  district.  The  result  appeared  in  a  remarkable  exten- 
sion of  the  company's  business.  While  the  total  freight  ton  mileage 
from  1878  to  1884  increased  103  per  cent,  the  ton  mileage  of  coal 
increased  190  per  cent,  or  nearly  tripled ;  and  while  the  gross  earn- 
ings on  ordinary  freight  grew  from  $7,950,031  to  $11,687,520,  those 

1  Chron.  26:419,  1878. 

2  Ibid.  26:469,  1878.    For  indenture  executed  by  the  new  corporation  and  for 
text  of  the  first  and  second  consolidated  mortgage  and  of  the  second  consolidated 
funded  coupon  mortgage,  see  Hepburn  Committee  Report, vol.  2,  Exhibits,  pp.3 15-50. 

8  Mott,  p.  268. 


ERIE  51 

on  coal  increased  from  $2,697,776  to  $5,437,000.  At  the  same  time 
McKean  County,  directly  north  of  the  coal  lands,  and  containing 
large  tracts  purchased  by  the  Erie  in  the  course  of  its  other  negotia- 
tions, turned  out  to  be  an  abundant  oil-producing  district,  and  made 
the  Bradford  branch,  which  tapped  it,  Erie's  most  valuable  collateral 
property.1 

It  was  partly  because  of  the  success  of  the  policy  in  respect  to 
coal  lands  that  the  Erie  was  enabled  to  spend  large  sums  in  the 
improvement  of  its  road.  In  the  six  years  from  1878  to  1883  the 
company  put  nearly  $14,000,000  into  improvements  of  the  road, 
property  and  equipment,  and  of  this  about  one-half  was  paid  out 
of  surplus  earnings.  In  December,  1883,  alone,  $304,565  were  spent, 
and  in  the  three  succeeding  months  nearly  double  that  amount ; 
making  a  total  of  nearly  $1,000,000  in  the  four  months  previous  to 
April,  1884.  The  money  went  toward  reducing  grades,  straighten- 
ing curves,  increasing  weight  of  rails,  etc.,  including  the  completion 
of  a  third  rail  to  Buffalo  by  which  the  serious  disadvantage  of  an 
exceptional  gauge  was  removed.  Its  result  was  seen  in  the  decrease 
in  the  ratio  of  operating  expenses  from  75.13  hi  1875  and  77.16  in 
1876  to  64.78  in  1883  »  and  in  the  rise  of  net  earnings  per  ton  mile 
from  .251  cents  to  .261  cents,  while  the  gross  earnings  per  ton  mile 
decreased  from  1.209  cents  to  .780  cents.  No  policy  which  the  Erie 
managers  pursued  met  a  more  crying  need,  and  none  did  so  much 
toward  maintaining  the  solvency  of  the  company. 

The  project  of  controlling  a  line  of  then*  own  to  Chicago  was 
brought  actively  to  the  attention  of  the  Erie  managers  by  the  danger 
of  being  cut  off  from  a  connection  with  that  city.  The  original  line 
of  the  Erie  had  run  to  Dunkirk  on  Lake  Erie,  from  which  a  branch 
to  Buffalo  had  soon  been  built.  For  western  traffic  the  Erie  had 
had  to  rely  largely  on  the  Atlantic  &  Great  Western  (later  the  New 
York,  Pennsylvania  &  Ohio),  which  connected  with  the  main  line 
at  Salamanca,  New  York,  and  extended  by  1884  west  to  Dayton, 
Ohio.  In  1857  the  Erie  first  leased  this  property.  Placed  hi  receivers* 
hands  in  1869,  the  Atlantic  &  Great  Western  was  re-leased  to  the 
Erie  on  January  i,  1870;  sold  July  i,  1871,  it  was  again  leased  to 
the  Erie  hi  May,  1874,  only  to  enter  upon  a  new  receivership  on 
December  9  of  that  year.  The  persistent  attempt  to  control  the  road 

1  Mott,  p.  269. 


52  RAILROAD  REORGANIZATION 

showed  the  value  which  the  Erie  placed  upon  it,  and  in  fact  it  was 
invaluable  as  a  link  in  a  prospective  line  to  the  West.  Even  while 
the  leases  were  in  force,  however,  the  Erie  lacked  that  connection  of 
its  own  with  Chicago  which  seemed  necessary  to  make  it  a  successful 
competitor  for  trunk-line  business.  In  1882  it  was  forwarding  pas- 
sengers over  not  less  than  five  different  routes,  over  no  one  of  which 
could  it  feel  assured  of  the  continuance  of  contracts  of  a  favorable 
nature.  In  1881  Mr.  Jewett  relieved  the  situation  by  acquiring  con- 
trol of  the  franchise  of  the  Chicago  &  Atlantic  Railway,  extending 
from  Marion,  Ohio,  on  the  line  of  the  New  York,  Pennsylvania  & 
Ohio  towards  Chicago,  and  soon  after  he  entered  into  a  contract  with 
certain  private  parties  for  construction  of  the  road.  In  1883  he  exe- 
cuted a  new  lease  of  the  New  York,  Pensylvania  &  Ohio,  which  he 
hoped  would  secure  for  the  Erie  permanent  control  of  the  property, 
and  about  the  same  time  (1882)  he  purchased  a  controlling  interest 
in  the  stock  of  the  Cincinnati,  Hamilton  &  Dayton,  which  extended 
the  Erie  system  to  the  important  city  of  Cincinnati.  These  operations 
put  the  Erie  upon  a  footing  which  was  secure  so  long  as  the  obliga- 
tions which  they  entailed  could  be  met,  and  showed  a  broad-minded 
appreciation  of  strategic  necessities.  The  terms  of  the  arrangement 
with  the  Chicago  &  Atlantic  were  as  follows :  For  the  construction 
of  the  road  the  Erie  agreed  to  give  to  the  directors  the  entire  proceeds 
of  the  mortgage  bonds  of  that  branch  ($6,500,0x30),  and  its  entire 
capital  stock  ($10,000,000) ;  making  an  aggregate  of  $61,710  per 
mile  of  line.  The  proceeds  were,  however,  to  be  deposited  with  the 
president  of  the  New  York,  Lake  Erie  &  Western  in  trust,  together 
with  certain  subsidies  which  had  been  voted  by  the  counties  and 
townships  along  the  line,  and  upon  him  was  to  devolve  the  duty  of 
seeing  to  the  proper  application  thereof;  and  besides  this,  90  per 
cent  of  the  stock  was  to  be  deposited  and  an  irrevocable  proxy 
given  thereon  for  the  thirty  years'  life  of  the  bonds.1  The  obligation 
which  the  Erie  assumed  amounted  in  practice  to  guaranteeing  that 
the  road  should  be  constructed  for  the  sum  provided,  and  that 
interest  on  the  bonds  should  be  paid.  In  leasing  the  New  York, 
Pennsylvania  &  Ohio  the  Erie  involved  itself  more  heavily.  As  lessee 
it  agreed  to  pay  the  minimum  sum  of  $1,757,055  yearly  (the  net  earn- 
ings of  1882) ;  the  actual  rental  to  be  32  per  cent  of  all  gross  earn- 

1  Annual  Report,  1882. 


ERIE  53 

ings  up  to  $6,000,000  and  50  per  cent  of  all  gross  earnings  al^ve 
$6,000,000,  until  the  average  of  the  whole  rental  should  be  raised 
to  35  per  cent,  or  until  the  gross  earnings  should  be  $7,200,000.  If 
32  per  cent  of  the  gross  earnings  should  ever  be  less  than  the 
$1,757,055  to  be  paid  yearly,  then  the  deficiency  was  to  be  made  up, 
without  interest,  out  of  the  excess  in  any  subsequent  year.  Out  of 
the  rental  the  New  York,  Pennsylvania  &  Ohio  was  to  pay  the  inter- 
est on  its  prior  lien  bonds,  the  rentals  of  its  leased  lines,  the  expenses 
of  maintaining  its  organization  in  Europe  and  America,  and  for 
five  years  a  sum  of  $260,000  each  year  to  the  car  trust.1  Finally, 
in  purchasing  the  Cincinnati,  Hamilton  &  Dayton,  the  Erie  gave 
to  the  holders  of  the  $2,000,000  of  stock  which  it  bought  beneficial 
certificates  to  the  amount  of  $1,500,000,  on  which  it  agreed  to  make 
good  any  failure  of  the  Cincinnati  company  to  pay  6  per  cent  per 
annum. 

But  though  the  Erie  managers  did  their  best  with  the  conditions 
which  they  were  called  upon  to  face,  they  were  unable  to  hold  the 
company  up  under  the  enormous  capitalization  and  heavy  charges 
left  by  the  reorganization  of  1874-8,  at  a  time  when  rate  wars  were 
sapping  its  resources,  and  when  contracts  which  it  was  being  forced 
to  make  were  entailing  an  annual  loss.2  In  spite  of  the  declaration 
of  sufficient  dividends  on  the  comparatively  small  amount  of  pre- 
ferred stock  to  terminate  the  voting  trust,  it  is  certain  that  for  most 
of  the  years  from  1874  to  1884  the  solvency  of  the  road  was  a  pre- 
carious matter,  and  that  there  never  was  a  time  when  any  consider- 
able falling  off  in  earnings  or  any  severe  shock  to  its  credit  would 
not  have  driven  it  to  the  wall. 

Such  a  shock  was  preparing  in  the  early  months  of  1884.  For 
some  weeks  before  the  last  of  April  there  had  been  a  tendency  for 
the  quotations  of  Erie  securities  to  fall ;  no  reason  was  assigned,  but 
it  was  hinted  that  default  might  be  made  in  the  payment  of  the  June 
interest  on  the  second  consols,  and  that  a  receivership  was  not  un- 
likely. This  weakness  was  accompanied,  and  perhaps  accentuated, 

1  Chron.  36:427,  1883.    For  the  necessity  of  Erie's  extension  westward  see  testi- 
mony of  First  Vice -President  Felton  before  the  Senate  Committee  on  Transportation 
Interests  of  the  United  States  and  Canada,  5ist  Congress,  ist  Session,  Report  no.  847, 
pp.  130-1. 

2  For  some  account  of  the  trunk-line  rate  wars  see  the  chapter  on  the  Baltimore 
&  Ohio. 


54  RAILROAD  REORGANIZATION 

by  a  strike  of  the  brakemen  on  the  New  York,  Pennsylvania  &  Ohio 
in  consequence  of  an  order  reducing  the  number  of  brakemen  on 
each  train  from  three  to  two.  The  truth  of  the  matter  came  out  in 
May,  when  the  failure  of  the  Wall  Street  firm  of  Grant  &  Ward 
both  precipitated  a  stock  exchange  panic  and  laid  bare  the  straits 
to  which  the  company  had  been  reduced.  Investigation  showed 
that  a  large  floating  debt  had  been  piling  up  for  four  principal  pur- 
poses :  First,  advances  to  the  Chicago  &  Atlantic  Railroad ;  second, 
advances  for  coal  mines;  third,  advances  for  improvements  on 
the  Hudson  River  at  Weehawken ;  fourth,  equipment  instalments.1 
Attempts  to  raise  funds  to  cover  the  debt  had  resulted  in  the  negotia- 
tion of  promissory  short  time  notes  with  the  firm  of  Grant  &  Ward, 
for  which  $2,500,000  of  Chicago  &  Atlantic  second  mortgage  bonds 
had  been  deposited  as  security.  The  company  had  been  attracted 
to  Grant  &  Ward  by  their  offer  to  purchase  and  dispose  of  Chicago 
&  Atlantic  bonds  at  a  price  15  per  cent  above  that  offered  by  any 
other  parties ; 2  and  had  trusted  so  implicitly  hi  their  integrity  as  to 
deposit  notes  and  collateral  for  its  short  time  loans  detached  and 
independent,  one  from  the  other,  so  that  Grant  &  Ward  were  able 
to,  and  did,  fraudulently  raise  money  upon  them  to  an  amount  much 
larger  than  the  advances  they  had  made.  The  losses  entailed  by  the 
transaction  were  serious,  and  the  blow  to  Erie's  credit  was  even 
more  severe.  The  floating  debt  which  had  been  so  hard  to  carry 
became  doubly  menacing  now  that  the  possibility  of  further  short 
time  loans  was  practically  cut  off;  and  to  cap  the  climax,  the  earn- 
ings for  the  first  half  of  the  year  1884  showed  an  unusually  large 
decrease  with  the  cessation  of  the  fall  business.  Under  these  circum- 
stances it  was  the  part  of  wisdom  to  take  advantage  of  every  loop- 
hole of  escape,  and  the  peculiar  provisions  of  the  second  consolidated 
mortgage,  denying  to  these  bonds  the  right  of  immediate  foreclosure 
in  case  of  default,  were  turned  to  for  relief.  It  will  be  remembered 
that  by  the  terms  of  the  reorganization  of  1878  no  right  of  action 
was  to  accrue  to  the  second  mortgage  bondholders  until  on  each 
of  six  successive  due  dates  of  coupons  (three  years)  some  interest 
secured  by  the  second  indenture  should  be  in  default.  This  being 
the  case  the  Erie  directors  decided  to  pass  the  June  interest  on  these 
bonds.  "As  a  general  rule,"  said  they  in  a  circular,  "the  business 

1  Chron.  39:234,  1884.  2  Annual  Report,  1884,  p.  12. 


ERIE  55 

and  earnings  of  the  company  are  much  less  for  the  first  half  than 
for  the  last  half  of  the  year.  The  falling  off  in  earnings  for  the  first 
six  months  of  the  previous  year  has  been  unusually  large.  The 
coupons  of  the  second  consolidated  mortgage  bonds  are  due  and 
payable  on  the  first  of  June  prox.  .  .  .  Under  ordinary  circumstances 
the  board  might  at  the  present  as  on  the  former  occasions  provide 
to  some  extent  for  the  deficit  of  the  first  six  months,  relying  on  the 
usual  increase  in  earnings  of  the  last  half  of  the  year,  but  hi  the  pre- 
sent depressed  condition  of  the  business  of  the  country  and  of  the 
earnings  of  this  company,  as  well  as  of  others,  the  board  does  not 
feel  at  liberty  to  deal  with  anything  but  the  business  and  earnings 
as  now  ascertained,  and  therefore  deems  it  wise  to  accept  the  pro- 
visions of  the  mortgage  as  the  lawful  rule  for  their  government  in 
the  existing  emergency  .  .  ." l 

However  necessary  the  action,  the  bondholders  of  the  company 
could  not  have  been  expected  to  receive  it  quietly ;  and  naturally 
again,  the  indignation  was  intense  among  the  English  security- 
holders,  to  whom,  more  than  to  any  one  else,  the  existing  situation 
was  due.  In  June,  1884,  a  meeting  of  stockholders  of  the  company 
was  held  in  London,  at  which  much  complaint  was  made  of  the  fall 
in  value  of  the  securities  of  the  company,  and  an  inquiry  into  the 
management  was  demanded.  A  committee  was  appointed,  and  two 
of  its  members,  Messrs.  Powell  and  Westlake,  landed  in  New  York 
July  15,  with  protestations  of  a  friendly  spirit  toward  all  concerned. 
The  situation  was  not  encouraging.  The  day  before  their  arrival 
President  Jewett  had  offered  his  resignation,  and  the  directors  were 
busy  selecting  his  successor;  a  large  floating  debt  was  demanding 
most  vigorous  attention,  and  confidence  in  the  company  was  at  a 
low  ebb.  Beyond  a  doubt  the  raising  of  a  large  amount  of  cash, 
$4,000,000  to  $5,000,000,  was  a  pressing  necessity,  and  the  English 
representatives  were  anxious  to  make  it  plain  that  at  least  a  fair 
share  of  this  should  come  from  American  as  well  as  from  English 
bondholders.  Force  of  circumstances  compelled  them  to  give  assur- 
ance that  the  money  would  be  raised,  and  this  done,  Mr.  John  King 
accepted  the  position  which  Mr.  Jewett  professed  himself  ready  to 
resign.  Pending  the  annual  election  Mr.  King  took  the  position 
of  Assistant  to  the  President. 

1  R.  R.  Gaz.  16:421,  1884. 


56  RAILROAD  REORGANIZATION 

On  their  return  to  London  Messrs.  Powell  and  Westlake  reported 
the  floating  debt  to  be  as  follows : 

Unpaid  coupons,  June  i,  1884,  $1,007,922 

Balance  of  actual  and  early  maturing  liabilities  other  than  the  June  i 
coupons  over  and  above  cash  in  hand  and  money  assets  con- 
sidered good  and  available,  $4,447,316 

"All  the  purposes,  the  expenditures  on  which  have  caused  the 
floating  debt,"  said  they,  "seem  to  us  to  have  been  in  themselves 
wise  and  politic,  but  the  piling  up  of  a  large  floating  debt  for  even 
the  best  of  purposes  is  always  more  or  less  imprudent  and  danger- 
ous. The  company's  credit  might  have  borne  the  strain  of  the  panic, 
but  it  was  broken  down  by  the  Grant  &  Ward  disaster,  and  the 
funding  of  its  floating  debt  is  now  indispensable.  -.  .  .  We  have 
suggested  to  the  president  and  directors,  and  now  recommend  to  the 
committee  that  an  effort  should  be  made  without  delay  to  raise  a 
permanent  loan  on  the  securities  available  for  a  total  of  $5,000,000."  l 
This,  it  will  be  observed,  was  the  old  remedy.  Inability  to  meet 
current  expenses  was  to  be  removed  by  capitalizing  the  debts  which 
this  inability  had  caused. 

The  year  1885  was  taken  up  with  suits  brought  against  the  Erie 
by  certain  of  its  branch  lines.  In  February  the  directors  of  the 
Buffalo  &  Southwestern  Company  brought  suit  to  recover  $345,000 
interest  defaulted  during  the  previous  January.  The  complaint 
alleged  that  the  Erie  was  insolvent,  and  asked  that  it  be  restrained 
from  using  the  gross  receipts  of  the  road  until  the  default  should 
have  been  made  good.  The  Erie  paid  the  back  interest,  but  in  July, 
after  another  default,  an  injunction  was  obtained  forbidding  it  to 
divert  any  part  of  the  earnings  received  or  to  be  received  from  this 
property.  It  was  recited  that  on  May  24, 1881,  the  Buffalo  &  South- 
western had  been  leased  to  the  Erie  for  35  per  cent  of  the  gross 
earnings,  subject  to  certain  deductions;  that  the  Erie  had  delayed 
payment  of  the  rental  due  in  January,  1885,  and  had  refused  to  pay 
that  due  hi  July,  1885,  but  that  it  was  still  receiving  the  gross  earn- 
ings of  the  plaintiffs'  road,  and  had  applied  these  to  the  payment 
of  its  debts  other  than  the  rentals  of  this  road.2  In  November,  after 

1  Chron.  39 :  349,  1884. 

2  R.  R.  Gaz.  17:  446,  1885. 


ERIE  57 

the  Erie's  other  troubles  were  settled,  the  litigation  was  terminated 
by  an  agreement  to  reduce  the  Buffalo  &  Southwestern  rental  from 
35  per  cent  to  27?  per  cent.  Other  suits  arose,  directly  or  indirectly, 
because  of  the  control  which  Mr.  Jewett  maintained  as  trustee 
of  the  stock  of  the  Chicago  &  Atlantic  and  the  Cincinnati,  Hamil- 
ton &  Dayton  railways  even  after  his  resignation  from  the  Erie 
Company.  On  the  one  hand  President  King  was  anxious  to  re- 
possess himself  of  these  important  branches  for  the  Erie,  and  on 
the  other  Mr.  Jewett  was  not  disinclined  to  do  what  damage  he 
could  to  the  managers  who  had  succeeded  in  supplanting  him.  In 
the  matter  of  the  Chicago  &  Atlantic  Mr.  Jewett  gained  the  first 
victory  in  a  temporary'  hi  junction  forbidding  the  Erie  to  divert 
traffic  from  this  line  contrary  to  contract.  This  injunction  was 
soon,  however,  substantially  vacated,  and  President  King  hi  his 
turn  obtained  a  decision  that  Jewett  had  been  made  trustee  of 
the  Chicago  &  Atlantic  simply  because  he  had  been  at  the  time 
vice-president  of  the  New  York,  Lake  Erie  &  Western  Railroad 
Company  and  could  be  relied  upon  to  control  the  road  as  the  west- 
ern outlet  of  the  Erie.  A  receiver  was  subsequently  appointed  and 
the  road  reorganized  as  tl\e  Chicago  &  Erie  Railroad  Company,  the 
Erie  agreeing  to  guarantee  payment  of  its  first  mortgage  bonds, 
and  receiving  in  return  the  $100,000  of  capital  stock  and  $5,000,000 
in  income  bonds,  besides  $2,000,000  first  mortgage  bonds  which 
were  in  part  payment  of  old  advances.1  In  his  action  concerning 
the  Cincinnati,  Hamilton  &  Dayton  President  King  was  less  success- 
ful ;  and  Mr.  Jewett  was  sustained  in  his  refusal  to  deliver  proxies 
for  the  stock  held  to  the  larger  company.  The  result  was  to  turn 
the  Erie  to  the  Big  Four,  upon  which,  instead  of  upon  the  Dayton 
road,  the  management  was  for  some  time  to  rely  for  an  entrance 
into  Cincinnati. 

During  these  various  contests  the  suggestions  of  the  English 
committee  were  not  lost  to  view,  and  in  the  latter  part  of  1885 
they  crystallized  into  definite  propositions.  The  floating  debt  then 
consisted  of  two  parts :  first,  the  defaulted  coupons  on  the  second  con- 
solidated bonds ;  and  second,  the  current  liabilities  accumulated  for 
the  purposes  before  described.  The  relief  proposed  was  likewise  in 

1  For  terms  of  reorganization  see  Annual  Report,  1890;  also  R.  R.  Gaz.  19:  188, 
1887. 


58  RAILROAD  REORGANIZATION 

two  parts,  and  involved  the  issue  of  a  5  per  cent  mortgage,  secured 
by  deposit  of  the  second  consolidated  coupons  maturing  and  to 
mature  in  June  and  December,  1884,  June,  1885,  and  June,  1886, 
and  a  6  per  cent  mortgage  upon  the  property  of  the  Long  Dock 
Company,  comprising  the  valuable  terminals  of  the  Erie  at  Jersey 
City.1  The  funding  of  the  coupon  issue  proved  simplicity  itself; 
the  funded  coupons  were  exchanged  for  bonds  of  the  new  gold 
mortgage,  which  were  to  be  redeemable  at  105  at  the  pleasure  of  the 
company.2  By  the  end  of  1886  these  bonds  had  been  accepted  by 
the  holders  of  $32,982,500  of  the  outstanding  $33,597,400  of  the 
second  consols,  and  $3,957,900  of  them  had  been  issued.  Dealing 
with  the  Long  Dock  Company  was  slightly  complicated  by  the  fact 
that  8000  shares  of  that  company  were  pledged  as  part  security  for 
the  issue  of  Erie  collateral  bonds.  To  free  them  $800,000  in  cash 
were  deposited  with  the  trustee  of  the  mortgage,  which  were  in  turn 
employed  by  him  to  pay  off  $727,000  of  the  6  per  cent  collateral 
bonds,  thus  reducing  the  interest  charge  on  that  issue  $43,620  per 
annum.  This  done,  the  Long  Dock  Company  extended  the  lease  of  its 
property  and  franchises  to  the  Erie  to  1935  at  a  rental  of  $480,000 
per  annum,  and  contemporaneously  therewith  placed  a  consoli- 
dated mortgage  upon  its  property  to  secure  $7,500,000  of  5o-year 
6  per  cent  gold  bonds ;  of  which  $3,000,000  were  reserved  to  retire 
existing  indebtedness,  and  the  proceeds  of  $4,500,000  were  paid 
to  the  Erie  for  the  cancellation  of  its  floating  debt.  The  total  result 
was  to  increase  fixed  charges  by  $270,000  of  interest  at  6  per  cent  on 
the  Long  Dock  bonds,  and  by  $197,895  on  $3,957,900  of  the  new 
funded  55,  less  the  reduction  of  $43,620  on  cancelled  collateral 
bonds;  leaving  a  net  increase  of  $424,275. 3  For  its  ingenuity  the 
scheme  was  to  be  admired ;  from  any  other  point  of  view  it  was  to 
be  condemned  as  another  example  of  that  borrowing  to  pay  interest 
which  had  brought  the  Erie  to  its  existing  straits.  The  incapacity 
of  the  creditors  of  the  company  to  realize  that  continued  borrowing 
of  money  to  pay  current  obligations  was  only  to  ensure  repeated 
bankruptcy  seemed  complete. 

1  Annual  Report,  1886. 

2  Upon  such  redemption  a  corresponding  amount  of  the  original  coupons  were  to 
be  cancelled. 

3  Annual  Report,  1886. 


ERIE  59 

After  this  new  "salvation,"  the  Erie  started  once  more  on  its 
laborious  attempt  to  pay  interest  on  its  outstanding  bonds.  From 
1887  to  1892  the  business  increased  somewhat,  and  despite  a  decrease 
in  the  average  receipts  per  ton  mile  1  a  gain  of  about  $4,700,000 
in  gross  earnings  was  secured ;  from  which  is  to  be  deducted  an 
increase  of  $310,996  hi  fixed  charges,  and  of  $4,076,111  in  operating 
expenses. 

The  prohibition  of  pooling  in  1887  affected  the  company  un- 
favorably. Previous  to  the  passage  of  the  Interstate  Commerce  Act 
the  other  lines  had  been  paying  it  an  annual  average  of  $42,500 
on  west-bound  business  from  New  York  for  shortages  under 
the  operation  of  the  trunk-line  pool,  besides  about  $88,000  annu- 
ally on  east-bound  dead  freight  and  $19,770  on  live  stock.  These 
,  payments  ceased  when  the  Act  was  passed,  although  a  differential 
on  west-bound  traffic  was  subsequently  allowed.2  But  the  leak- 
age which  was  most  apparent  lay  hi  the  large  rental  and  heavy 
operating  cost  of  the  New  York,  Pennsylvania  &  Ohio.  It  will  be 
remembered  that  the  Erie  had  leased  that  road  for  32  per  cent 
of  the  gross  earnings  when  earnings  were  $6,000,000  or  under, 
and  50  per  cent  when  they  should  be  above  that  figure.  In  1887 
this  was  amended  so  as  to  provide  that  for  every  increase  of 
$100,000  over  $6,000,000  in  the  gross  earnings  the  Erie  should  pay 
to  the  lessor  an  additional  one-tenth  of  one  per  cent  of  such 
gross  earnings  until  the  gross  earnings  should  be  $7,250,000,  and 
the  rental  33 \  per  cent,  after  which  the  percentage  was  not  to 
increase.3  Under  the  old  lease  the  Erie  had  guaranteed  to  carry 
over  the  line  50  per  cent  of  all  its  east-bound  and  65  per  cent  of  all 
its  west-bound  through  traffic  —  under  the  new  lease,  these  maxima 
were  increased  to  55  per  cent  and  70  per  cent ;  but  even  this  failed  to 
make  the  branch  road  pay.  Its  grades  were  high,  its  equipment 
and  sidings  were  limited,  its  cost  of  operation  was  well  above  68  per 
cent ;  and  the  increase  in  tonnage  provided  for  emphasized  each  and 
every  disadvantage.  Up  to  1893  tne  results  of  operations  were  as 
follows : 

1  From  .662  in  1887  to  .610  in  1892. 

2  Testimony  of  Messrs.  King  and  Felton,  Senate  Committee  on  Transportation 
Interests  of  the  United  States  and  Canada,  pp.  44  and  121-2. 

3  Annual  Report,  1887. 


60  RAILROAD  REORGANIZATION 

Loss  Profit 

First  5  months  to  Sept.  30,  1883  $199,540 

Twelve  months  ending  Sept.  30,  1884  $270,281 

1885  239,820 

1886  51,322 

1887  9J,965 

1888  343,9" 

1889  331,134 

1890  77,376 

1891  19,586 

1892  425,888 

1893  197,106        

$1,827,726  $420,203 

Net  loss,  1,407,523 

It  thus  appears  that  the  terms  of  the  amended  lease  were  in  reality 
more  onerous  than  the  contract  which  they  succeeded,  and  that, 
whatever  the  value  of  the  branch  as  a  feeder,  its  operation  involved 
large  and  fairly  regular  deductions  from  the  net  income  of  the  parent 
line.  Emphasis  on  these  facts  was  laid  in  the  annual  reports,  and 
frequent  demands  were  made  that  the  New  York,  Pennsylvania  & 
Ohio  bring  its  road  up  to  the  standard  of  like  connections  of  through 
trunk  lines.  Meanwhile  improvements  were  imperative  on  the  Erie's 
own  lines:  new  equipment  was  needed,  new  rails  and  new  motive 
power,  and  at  the  same  time  surplus  earnings  were  somewhat  less. 
The  directors  adopted  the  expedient  of  allowing  current  liabilities 
to  accumulate,  and  put  $8,496,572  into  the  road  from  October  i, 
1884,  to  September  30, 1892,  of  which  $3,351,977  represented  surplus 
earnings,  $2,375,400  increase  in  bonded  indebtedness,  and  the  bal- 
ance floating  debt.  In  the  matter  of  traffic  policy  they  paid  partic- 
ular attention  to  the  coal  business,  which,  however,  lost  ground  as 
compared  with  other  freight,  and  to  the  local  business,  which  it 
was  the  policy  of  the  management  to  encourage.  In  1890  the  board 
declared  that  "  the  time  had  arrived  when  extraordinary  expend- 
iture for  improvements  and  the  necessities  of  the  property  were  no 
longer  necessary."  l  In  1891  3  per  cent  on  the  preferred  stock  was 
paid,  the  first  dividend  since  i884.2 

From  1887  to  1893,  with  all  its  struggles,  the  Erie  was  continually 

1  Mott,  p.  272. 

2  In  1890  a  traffic  agreement  was  made  with  the  Cincinnati,  Hamilton  &  Dayton, 
to  take  the  place  of  that  with  the  Big  Four.  R.  R.  Gaz.  22 :  314,  1890. 


ERIE  6 1 

on  the  verge  of  failure.  The  capitalization  in  1892  was  at  the  enor- 
mous total  of  $163,607,485  on  an  operated  mileage  of  1698  miles, 
while  fixed  charges  were  $4993  per  mile,  and  the  available  net 
revenue  but  $4830^  Given,  with  this  condition,  a  gross  floating 
debt  which  amounted  in  1892  to  $9,163,166,  and  represented  in  a 
large  measure  the  inability  of  the  company  to  make  necessary  re- 
pairs, no  further  explanation  is  needed  for  the  bankruptcy  which 
soon  took  place. 

Early  in  1893  rumors  were  current  that  the  Erie  might  be  thrown 
into  the  hands  of  a  receiver.  The  reports  were  vigorously  denied, 
but  on  July  25,  nevertheless,  on  application  of  the  company  itself, 
Judge  Lacombe  appointed  President  John  King  and  Mr.  J.  G. 
McCullough  as  receivers  of  the  property.  The  measure  was  taken 
to  avoid  the  sacrifice  of  collaterals  deposited.  "Within  the  last  few 
weeks,"  said  President  King,  "during  the  severe  money  stringency 
the  floating  debt  of  the  Erie  .  .  .  became  impossible  of  renewal, 
and  in  order  not  to  sacrifice  the  best  interests  of  the  company  it  was 
decided  to  place  the  road  in  receivers'  hands,  and  preserve  the  sys- 
tem intact,  and  preserve  and  develop  the  transportation  business  for 
the  company."  2  The  action  occasioned  no  surprise,  and  there  was 
even  a  disposition  to  praise  the  management  for  having  preserved  the 
solvency  of  the  company.  "The  company  was  bankrupt  de  facto 
when  it  passed  to  its  new  control,"  says  Mott,  and  "that  the  time 
when  it  must  become  bankrupt  de  jure  was  held  off  so  long  was 
a  striking  demonstration  of  the  tact  and  resourcefulness  which  the 
new  regime  had  been  able  to  bring  to  bear  in  the  management  of  the 
company's  unpromising  affairs,  and  in  judicious  shifting  and  mani- 
pulating of  the  heavy  burdens  Erie  bore  upon  its  chafed  and  weary 
shoulders."  *  What  a  receivership  meant  was  a  new  opportunity  to 
put  the  company  upon  a  genuinely  sound  foundation,  by  providing 
new  capital  to  pay  off  the  floating  debt  and  to  allow  for  future  addi- 
tions and  improvements,  and  by  getting  fixed  charges  to  a  point  well 
within  the  road's  capacity  to  earn.  We  shall  see  what  use  was  made 
of  the  chance. 

The  matter  of  reorganization  was  set  about  at  once.  On  Jan- 
uary i  a  plan  appeared,  prepared,  at  least  nominally,  by  a  special 

1  Figures  for  1891  were,  fixed  charges,  $4298  per  mile;  net  revenue,  $4897  per  mile. 
*  Chron.  57:  179,  1893.  3  Mott,  p.  273. 


62  RAILROAD  REORGANIZATION 

committee  chosen  by  the  directors,1  and  backed  by  the  well-known 
firms  of  Drexel,  Morgan  &  Co.  of  New  York  and  J.  S.  Morgan  & 
Co.  of  London.2  By  its  terms  no  mortgage  senior  to  the  second 
consolidated  mortgage  was  to  be  disturbed  save  the  first  mortgage, 
which  matured  in  1897.  The  bonds  to  be  dealt  with  were  thus  re- 
duced to  $41,481,048,  besides  which  provision  had  to  be  made  for 
the  floating  debt  and  for  future  capital  requirements.  The  plan 
proposed  to  authorize  a  blanket  mortgage  of  $70,000,000  at  5  per 
cent,  of  which  $33,597,000  were  to  exchange  at  par  for  the  6  per  cent 
second  consolidated  bonds  and  funded  coupons  thereof,  $4,031,400 
to  exchange  for  the  funded  coupon  bonds  of  1885,  and  $508,008  for 
the  income  bonds.  Of  the  balance,  $6,512,800  were  to  be  reserved 
to  settle  with  the  old  first  lien  and  collateral  trust  bonds,  $15,915,208 
to  supply  capital  requirements  in  the  future,  and  $9,915,208  to  be 
offered  for  subscription  in  order  to  pay  the  floating  debt.  The  new 
management  did  not  conceive  that  these  last  bonds  could  be  sold  to 
advantage  in  the  general  market,  but  imposed  as  a  condition  of  the 
exchanges  as  above  that  second  consols,  funded  coupon,  and  income 
bonds  should  subscribe  at  90  to  the  extent  of  25  per  cent  of  their 
holdings ;  hoping  that  the  grant  of  the  right  of  immediate  foreclosure 
upon  default  would  induce  the  second  consols  to  come  in.  Both  these 
consols  and  the  funded  coupon  bonds  of  1885,  it  may  be  remarked, 
were  to  be  kept  alive  and  deposited  with  the  trustee  for  the  pro- 
tection of  the  new  bonds.  Stated  in  tabular  form  the  distribution  of 
securities  was  to  be  as  follows : 

To  acquire  the  existing  second  consols,  $33,597,4oo 

To  acquire  the  funded  coupons  of  1885,  4,031,400 

To  acquire  the  income  bonds,  508,008 

For  subscription  as  above,  9,915,208 
To  acquire  the  old  reorganization  first  lien  and  collateral  trust 

bonds,  6,512,800 
To  be  expended  for  construction,  equipment,  etc.,  not  to  exceed 
$100,000  in  any  year,  except  that  $500,000  might  be  used  to 

acquire  existing  car  trusts,  15,435,184 

Total,  $70,000,000 

The  new  mortgage  was  to  cover  the  property  of  the  New  York, 
Lake  Erie  &  Western,  including  its  leasehold  of  the  New  York, 
Pennsylvania  &  Ohio,  and  the  capital  stock  of  the  Chicago  &  Erie 

1  Chron.  57:  938,  1893  ;  Ibid.  57:  1083,  1893.    2  Ry-  Times,  65:  3,  1894. 


ERIE  63 

Railroad.1  There  was  to  be  no  assessment,  no  syndicate  to  raise 
money,  and  no  voting  trust. 

This  plan  was  advanced  as  adequate  to  restore  the  prosperity 
of  the  company.  Examination  will  show  its  weakness.  It  com- 
prised two  measures  of  relief :  first,  reduction  of  interest  by  one  per 
cent  on  the  second  consolidated  bonds;  second,  the  settlement  of 
the  floating  debt.  The  first  might  be  thought  to  have  been  the  kernel 
of  the  plan,  and  the  reduction  hi  fixed  charges  the  principal  thing 
aimed  at.  That  it  was  not  is  shown  by  the  fact  that  so  liberal  were 
the  new  bond  issues  that  the  total  fixed  charges  after  reorganization 
were  to  be  greater  than  those  before.  The  floating  debt  which  re- 
mained had  arisen  from  lack  of  funds  with  which  to  make  current 
and  necessary  improvements  and  repairs.  This  debt  was  the  im- 
mediate cause  of  the  failure  of  the  company,  and  its  cancellation 
was  the  real  purpose  of  the  plan.  The  method  proposed  was  a 
forced  levy  upon  bondholders,  but  the  levy  took,  not  the  form  of 
an  assessment,  but  that  of  a  subscription  to  new  bonds  on  which 
payment  of  interest  was  to  be  as  obligatory  as  any  other  charge. 
The  operation  differed,  therefore,  from  an  ordinary  sale  of  secur- 
ities in  the  more  favorable  selling  price  which  it  assured.  It  did 
little,  however,  to  lighten  the  burden  which  had  crushed  the  com- 
pany. The  only  bright  spot  hi  the  plan  was  the  provision  for  future 
construction  and  improvement,  which,  though  involving  a  still 
further  increase  in  indebtedness,  was  justified  because  these  im- 
provements would  serve  not  only  to  maintain  but  to  make  greater 
the  earning  powers  of  the  company.  Finally,  it  was  the  peculiar 
effect  of  this  plan  that  it  put  the  pressure  imposed  upon  the  wrong 
parties :  the  second  consolidated  and  other  junior  bondholders  were 
to  be  forced  to  subscribe  to  the  new  issue,  when  in  fact  it  was  the 
stockholders  who  should  have  been  turned  to,  and  whom  it  was  con- 
sonant with  no  sound  principle  of  finance  to  spare.  Other  matters 
come  out  in  the  objections  raised  by  bondholders. 

Opposition  to  the  plan  was  vigorously  headed  by  men  like 
Kuhn,  Loeb  &  Co.,  E.  H.  Harriman,  August  Belmont,  Hallgarten, 
Peabody,  Vermilye,  and  others.2  In  England  a  meeting  of  dissent- 
ients was  held  and  a  committee  was  elected ; s  in  America  the  first 

1  R.  R.  Gaz.  26:  18,  1894. 

2  Ry.  Times,  65:  120,  1894.  s  Ibid.  65:  152,  1894. 


64  RAILROAD  REORGANIZATION 

formal  action  was  the  dispatch  of  a  letter  to  the  Erie  managers  by 
opposing  bankers  which  is  important  enough  to  be  quoted  in  full. 

"Consultations  and  comparisons  of  views  have  recently  taken 
place,"  said  these  gentlemen,  "between  the  owners  and  represent- 
atives of  the  second  consolidated  mortgage  bonds  and  other  bonds 
of  your  company,  to  whom  the  proposition  as  detailed  hi  your  cir- 
cular of  January  2  is  not  satisfactory.  .  .  .  Your  plan  seems  unjust, 
inasmuch  as  it  demands  a  permanent  reduction  of  interest  on  the 
bonded  indebtedness  for  which  no  adequate  equivalent  is  offered, 
and  it  levies  a  forced  contribution  upon  the  bondholders  through 
the  demand  for  a  subscription  to  new  bonds  af  a  price  considerably 
over  and  above  the  market  value  these  new  bonds  are  likely  to 
command,  while  the  fixed  charges  proposed  to  be  created  appear 
to  be  considerably  larger  than,  in  the  light  of  past  earnings  and 
experience,  the  property  of  the  company  can  carry  with  safety. 

"Instead  of  5  per  cent  bonds,  as  provided  hi  the  published  plan, 
4  per  cent  bonds,  in  our  opinion,  should  be  issued,  while  for  the 
interest  to  be  surrendered  "the  bondholders  should  receive  an 
equivalent  in  interminable  non-cumulative  4  per  cent  debentures, 
interest  payable  if  earned ;  the  holders  of  the  debentures  to  have 
sufficient  representation  in  the  management  to  protect  them. 

"The  floating  debt  should  be  liquidated  from  the  proceeds  of 
an  adequate  amount  of  new  4  per  cent  bonds  (and  debentures  if 
desirable),  which  shall  be  offered  to  the  shareholders  and  bond- 
holders at  a  price  rather  below  than  above  the  probable  market 
value  of  the  new  securities,  and  under  the  guarantee  of  an  under- 
writing syndicate. 

"Provision  should  also  be  made  to  obtain  the  conversion  on  fair 
terms  of  the  reorganization  prior  lien  bonds  into  the  new  bonds,  so 
that  it  shall  become  practicable  to  secure  the  new  4  per  cent  bonds 
at  once  by  a  lien  second  only  to  the  '  Erie  first  consolidated  7  per  cent 
bonds ' ;  the  new  4  per  cent  bonds  to  be  issued  under  a  general  mort- 
gage to  an  amount  sufficient  to  provide  for  future  additions  and 
improvements,  and  with  adequate  provision  for  the  taking  up  of  the 
underlying  bonds,  and  the  issue  of  4  per  cent  bonds  in  their  stead. 
.  .  .  Any  plan  now  adopted  for  the  readjustment  of  the  finances  of 
your  company  should  seek,  as  its  first  object,  to  reduce  the  per- 
manent charges  so  well  within  the  earning  capacity  of  the  property 


ERIE  65 

as  to  make  another  default  in  the  future  an  improbability.  .  .  .  We 
trust  this  communication  will  be  received  in  the  spirit  in  which  it 
is  submitted."  * 

The  directors  refused  to  modify  their  plan,  and  the  bankers, 
therefore,  notified  them  of  the  election  of  a  protective  committee.2 
On  March  6  a  meeting  of  stockholders  approved  the  plan,  and  the 
same  week  Messrs.  Drexel,  Morgan  &  Co.  gave  notice  that,  having 
received  deposits  of  a  majority  of  each  class  of  bonds,  they  had 
declared  the  plan  operative  as  announced.3 

Defeated  in  their  appeal  to  the  securityholders,  the  opposition 
turned  to  the  courts.  As  a  preliminary,  they  obtained  an  opinion 
from  the  well-known  firm  of  Messrs.  Evarts,  Choate  &  Beaman, 
which  held,  first,  that  the  Erie  could  not  legally  pay  interest  on  the 
new  bonds  proposed  until  it  had  paid  the  interest  on  every  one  of 
the  old  second  mortgage  bonds,  regardless  of  whether  the  latter  was 
deposited  with  the  reorganization  committee;  second,  that  if  the 
old  second  mortgage  bonds  which  ^were  deposited  as  security 
for  the  new  issue  should  be  kept  alive  as  proposed,  the  company 
would  be  increasing  its  obligations  beyond  the  legal  limit ; 4  and 
third,  that  much  of  the  stock  voted  at  the  special  meeting  at  which 
the  new  mortgage  had  been  authorized  was  not  really  owned  by  the 
persons  who  had  issued  the  proxies  thereon  as  the  law  provided.5 
Following  the  opinion,  suit  was  commenced  by  Mr.  Harriman  in 
April  for  an  injunction  against  the  recording  of  the  new  mortgage, 
on  the  ground  that  the  Drexel  &  Morgan  proxies  did  not  represent 
the  actual  stockholders,  and  in  June  by  one  John  J.  Emery  to  pre- 
vent the  execution  of  the  mortgage.  Judge  Ingraham  in  the  Supreme 
Court  Chambers  denied  an  injunction,  using  in  his  opinion  the 
following  language:  " While  it  is  clear,"  said  he,  "that  there  are 
certain  obligations  resting  upon  the  majority  to  refrain  from  in- 
fringing the  legal  right  of  the  minority,  and  that  a  court  of  equity 
will  enforce  andjprotect  the  rights  of  the  miriority,  still,  when  the 
holder  of  a  very  small  number  of  bonds  or  shares  of  stock  seeks  to 

1  Chron.  58:  264,  1894.  2  Ibid.  58:383,  1894.  3  Ibid.  58:430,  1894. 

4  According  to  the  law  of  1892  the  bonded  indebtedness,  including  mortgages 
given  as  consideration  for  the  purchase  of  real  estate  and  mortgages  authorized  by 
contract  prior  to  May,  1891,  could  not  exceed  the  amount  of  the  paid  up  capital 
stock. 

6  Ry.  Rev.  34:  181,  1894. 


66  RAILROAD  REORGANIZATION 

enjoin  a  very  large  majority  from  carrying  out  a  plan  such  majority 
deem  to  be  for  their  benefit,  I  think  the  court  should  not  interfere 
unless  it  plainly  appears  that  some  legal  right  of  the  minority  is 
endangered."  l 

What  could  not  be  accomplished  by  the  hostile  bankers  was 
nevertheless  to  happen  from  the  inherent  weakness  of  the  plan 
itself.  It  has  been  said  that  the  new  scheme  involved  an  increase 
instead  of  a  decrease  in  fixed  charges.  How  this  was  to  be  met 
was  not  demonstrated;  and  already  in  June,  1894,  it  was  necessary 
to  announce  that  the  coupons  then  due  would  not  be  paid  for  the 
present.  In  December  matters  were  even  worse,  and  a  circular 
from  Drexel,  Morgan  &  Co.  confessed  the  company's  inability  to 
meet  the  coupons  maturing.  "Nevertheless,"  the  firm  continued, 
"it  seems  to  us  inexpedient  to  treat  the  inability  of  the  company 
to  pay  interest  as  an  occasion  for  present  foreclosure  without  giving 
a  further  chance  to  the  company,  especially  as  payment  of  bond- 
holders' subscriptions  to  the  new  bonds  has  not  yet  been  called 
to  provide  the  company  with  money  necessary  to  pay  the  floating 
debt.  It  is,  therefore,  now  proposed  that  the  new  bonds  be  issued 
with  the  coupons  of  June  i,  1894,  and  December,  1894,  attached,  but 
stamped  as  subject  to  a  contract  with  the  company  which  shall 
provide  that  they  shall  be  paid  as  soon  as  practical  out  of  the  first 
net  earnings  over  and  above  the  railroad  company's  requirements  to 
meet  interest  and  rentals  accruing  after  December  i,  1894,  except 
in  case  a  default  on  later  coupons  shall  give  power  of  foreclosure, 
in  which  event  the  stamped  coupons  shall  retain  all  their  original 
rights."  The  modification  was  assented  to,2  but  could  not  save  the 
plan.  Reluctantly  the  managers  were  forced  to  abandon  it,  and  to 
consent  to  more  radical  propositions. 

August  26,  1895,  the  new  and  final  reorganization  plan  appeared. 
There  were  to  be  issued : 

$i  75,000,000  first  consolidated  mortgage  zoo-year  gold  bonds ; 
30,000,000  first  preferred  4  per  cent  non -cumulative  stock  ; 
16,000,000  second  preferred  4  per  cent  non -cumulative  stock  ; 
100,000,000  common  stock. 

The  first  consolidated  mortgage  bonds  were  to  be  divided  into 
prior  lien  bonds  to  the  amount  of  $35,000,000,  and  general  lien 

1  R.  R.  Gaz.  26:  472,  1894.  2  Ibid.  27:  554,  1895. 


ERIE  67 

bonds  to  the  amount  of  $140,000,000;  the  former  to  have  priority 
of  lien  over  the  latter  for  both  principal  and  interest.  Both  classes 
of  bonds  were  to  be  secured  by  mortgage  and  pledge  of  all  railroads 
and  properties  of  every  kind  embraced  in  the  reorganization  as 
carried  out  and  vested  in  the  new  company,  and  also  all  other 
properties  which  should  be  acquired  thereafter  by  issue  of  any  of 
the  new  bonds.  Both  issues  were  to  bear  interest  at  4  per  cent,  ex- 
cept $29,435,000  of  the  general  lien  bonds,  which  were  to  bear  3  per 
cent  for  two  years  from  July  i,  1896,  and  4  per  cent  thereafter.  The 
stock  was  to  rank  for  dividends  in  the  order  given.  Provision  was 
made  that  no  additional  mortgage  could  be  put  upon  the  property 
to  be  acquired,  and  that  no  additional  issue  of  first  preferred  stock 
could  be  made  except  with  the  consent  hi  each  instance  of  the  holders 
of  a  majority  of  the  whole  amount  of  each  class  of  preferred  stock, 
given  at  a  meeting  of  the  stockholders  called  for  that  purpose ;  and 
with  the  consent  of  the  stockholders  of  a  majority  of  such  part  of 
the  common  stock  as  should  be  represented  at  such  meeting,  the 
holders  of  each  class  of  stock  voting  separately ;  also  that  the  amount 
of  second  preferred  stock  could  not  be  increased  except  with  like 
consent  of  the  holders  of  a  majority  thereof,  and  a  majority  of  such 
part  of  the  common  stock  as  should  be  represented  at  the  meeting. 
All  classes  of  stock  were  to  be  deposited  hi  a  voting  trust  until  De- 
cember i,  1900,  and  until  the  expiration  of  such  further  period,  if 
any,  as  should  elapse  before  the  Erie  should  in  one  year  have  paid 
4  per  cent  cash  dividends  on  the  first  preferred  stock;  though  the 
voting  trustees  might  terminate  the  trust  earlier  at  their  dis- 
cretion. 

Generally  speaking,  the  prior  lien  bonds  were  relied  on  to  pay  the 
floating  debt,  to  buy  hi  the  New  York,  Pennsylvania  &  Ohio,  and 
to  retire  certain  prior  liens  of  the  old  company.  The  general  lien 
bonds  were  reserved  for  undisturbed  bonds,  and,  with  the  first  pre- 
ferred stock,  exchanged  for  junior  New  York,  Lake  Erie  &  Western 
securities.  The  second  preferred  stock  went  for  old  preferred  stock 
and  income  bonds,  and  the  new  common  stock  exchanged  for  old 
common. 

The  distribution  was  as  follows:  The  old  New  York,  Lake 
Erie  &  Western  reorganization  first  lien  and  collateral  bonds  were 
paid  off  from  the  proceeds  of  the  new  prior  lien  bonds ;  the  second 


68  RAILROAD  REORGANIZATION 

consols  received  75  per  cent  in  new  general  lien  bonds  and  55  per 
cent  in  preferred  stock;  the  funded  coupon  bonds  of  1885  received 
ico  per  cent  in  general  lien  bonds,  10  per  cent  in  first  preferred, 
and  10  per  cent  in  second  preferred  stock;  the  income  bonds 
40  per  cent  in  general  liens  and  60  per  cent  in  first  preferred  stock ; 
the  New  York,  Lake  Erie  &  Western  preferred  stock,  on  payment 
of  assessment,  100  per  cent  in  new  common.  For  all  other  bonds 
included  in  the  plan  there  were  reserved  general  lien  bonds  in 
amounts  usually  equal  to  the  par  of  the  securities  to  be  retired. 
The  cash  requirements  and  the  floating  debt  were  as  follows : 

Floating  debt,  receivers'  certificates,  etc.,  $11,500,000 

Collateral  trust  bonds  (Erie),  at  no,  3,678,400 

Reorganization  first  lien  bonds  (Erie),  2,500,000 

Early  construction  and  expenditures,  5>337>288 

Car  trusts  for  three  years,  2,000,000 

$25,015,688 

The  necessity  for  retirement  of  the  first  lien  and  collateral  bonds 
arose  from  the  early  maturity  of  the  former,  and  from  the  fact  that 
stocks  and  bonds  of  various  Erie  properties  which  it  was  desirous 
to  consolidate  with  the  new  company  were  pledged  for  the  latter. 
The  wisdom  of  allowing  for  early  construction  and  expenditure 
could  not  be  denieB ;  car  trust  payments  were  required  to  preserve 
the  rolling  stock,  and  the  floating  debt  and  receivers'  certificates 
called  obviously  for  cash.  Provision  was  made,  first,  by  an  assess- 
ment on  the  stock  of  $8  on  preferred  and  $12  on  common,  with 
higher  payments  in  case  of  delay,  and  estimated  to  yield  $10,023,368 ; 
second,  by  a  contribution  from  the  New  York,  Pennsylvania  &  Ohio 
of  $742,320;  and  third,  by  the  sale  of  $15,000,000  prior  lien  bonds 
as  indicated  above.  A  syndicate  of  $25,000,000  was  formed  to  sub- 
scribe to  the  prior  liens,  and  to  take  the  place  of  and  succeed  to  all 
the  rights  of  stockholders  who  should  not  deposit  their  stock  and 
pay  the  assessment  thereon. 

With  the  settlement  of  cash  requirements,  unification  of  the  Erie 
system  was  assured;  " subject  only  to  the  undisturbed  bonds  and 
stock  until  retired  by  use  of  the  bonds  reserved  for  that  purpose -or 
the  rentals  corresponding  thereto."  "The  new  bonds  and  stock 
will,"  said  the  plan,  "represent  the  ownership  (either  in  fee  or  in 
possession  of  securities)  approximately  of : 


ERIE  69 

.       N.  Y.,  L.  E.  &  W.  proper,  538  miles 

N.  Y.,  P.  &  O.,  600 

Chicago  &  Erie,  250 

N.  Y.,  L.  E.  &  W.  Auxiliary  Companies,  550 

Total,  1938  miles 1 

-  with  valuable  terminal  facilities  at  Jersey  City,  Weehawken,  Buf- 
falo, etc.,  and  also  one-fifth  ownership  in  the  stock  of  the  Chicago  & 
Western  Indiana  Railroad  Company.  Also  all  the  Erie  coal  proper- 
ties, .  .  .  representing  an  aggregate  of  1 0,000  acres  of  anthracite,  of 
which  about  9000  acres  are  held  in  fee,  and  14,000  acres  of  bitum- 
inous, held  under  mining  rights  .  .  .  also  the  Union  Steamboat 
Company,  with  its  terminals  and  other  properties  in  Buffalo,  and  its 
fleet  of  five  lake  steamers  on  which  the  Erie  mainly  depends  for  the 
lake  and  railway  traffic,"  etc. 

Fixed  charges  under  the  plan  were  estimated  at  $7,850,000. 
Fixed  charges  in  1894  had  been  $9,400,000.  For  the  first  two  years 
after  reorganization,  moreover,  the  charges  were  to  be  further  re- 
duced by  $300,000  per  annum,  as  the  new  general  lien  bonds  were 
to  bear  only  3  per  cent  interest  during  that  period ;  and  an  addi- 
tional saving  of  $1,000,000  was  looked  for  when  the  exchange  of 
old  bonds  for  new  on  the  maturity  of  its  existing  prior  issues  should 
have  been  eventually  completed.  This  sum  of  $7,850,000  the  com- 
pany was  expected  to  have  no  difficulty  in  earning  in  view  of  the 
immediate  expenditure  of  $5,337,208  for  new  construction,  addi- 
tions, and  betterments,  and  the  gradual  distribution  of  the  proceeds 
of  $17,000,000  of  general  lien  bonds  to  the  same  end.  The  compen- 
sation to  Messrs.  J.  P.  Morgan  &  Co.  and  Messrs.  J.  S.  Morgan  & 
Co.  for  their  services  as  depositaries,  and  in  carrying  out  the  plan 
was  put  at  $500,000  and  expenses.  Foreclosure  was  finally  to  take 
place  and  a  new  company  was  to  be  organized. 

This  plan  differed  from  its  abandoned  predecessors  in  four  im- 
portant particulars,  each  of  which  was  in  its  favor: 

(1)  It  employed  bonds  and  stock  instead  of  bonds  alone; 

(2)  It  lowered  instead  of  increased  fixed  charges; 

(3)  It  procured  cash  from  stockholders  instead  of  from  second 
consolidated  mortgage  bondholders;  and 

1  New  York,  Pennsylvania  &  Ohio  voting  trustees  agreed  to  foreclose  and  deliver 
the  New  York,  Pennsylvania  &  Ohio  property,  subject  only  to  the  prior  lien,  equip- 
ment, and  leased-line  securities  for  which  reservation  was  made. 


70  RAILROAD  REORGANIZATION 

(4)  It  absorbed  the  New  York,  Pennsylvania  &  Ohio  into  the 
Erie  system  instead  of  continuing  the  lease  thereof. 

In  the  employment  of  bonds  and  stock  instead  of  a  simple  issue 
of  bonds,  the  Erie  managers  adopted  what  experience  has  shown 
to  be  the  best  method  of  dealing  with  the  complicated  situation 
arising  from  a  great  railroad  default.  The  use  of  securities  on  which 
return  was  optional  side  by  side  with  those  on  which  return  was 
obligatory  tended  both  to  protect  the  railroad  company  when  earn- 
ings were  low,  and  to  benefit  the  recipients  of  the  new  securities 
when  earnings  were  high.  As  worked  out,  it  gave  to  the  second 
consols  and  funded  coupons  a  less  return  in  the  one  case,  and  an 
equal  or  greater  return  in  the  other,  than  did  the  plan  of  1894, 
and  to  the  income  bonds,  though  it  offered  no  chance  of  equal  gain, 
it  at  least  promised  a  minimum  below  which  payments  should 
not  fall.  It  further  made  a  far  nicer  recognition  of  the  relative 
priorities  of  different  classes  of  old  bonds  possible,  and  whereas 
the  previous  plan  had  made  the  same  demands  on,  and  had  given 
the  same  return  to  the  second  consols,  the  funded  coupon  bonds 
of  1885,  and  the  income  bonds,  the  new  plan  gave,  as  has  been 
pointed  out,  to  the  first  75  per  cent  in  general  lien  bonds  and  55  per 
cent  in  first  preferred  stock ;  to  the  second,  100  per  cent  in  general 
lien  bonds,  10  per  cent  in  first  preferred,  and  10  per  cent  in  second 
preferred ;  and  to  the  third,  40  per  cent  in  general  liens  and  60  per 
cent  in  first  preferred  stock.  Income,  coupon,  and  consolidated 
bonds  benefited  alike  from  the  assessment  upon  the  stock,  which 
laid  the  burden  of  raising  cash  upon  the  owners  of  the  road, 
where  it  most  properly  fell.  No  species  of  security  was  given  for 
the  assessment,  not  even  common  stock,  with  which  the  managers 
might  well  have  been  generous ;  although  it  must  be  remembered 
that  the  sale  of  $15,000,000  prior  lien  bonds  for  cash  was  part  of 
the  reorganization  plan.  It  may  be  remarked  that  since,  on  July  2, 
1895,  the  common  stock  was  being  offered  at  lof,  with  no  sales, 
and  the  preferred  at  22^,  and  since  the  chance  for  dividends  which 
the  new  stock  was  to  enjoy  was  most  remote,  it  was  perhaps  well 
that  the  syndicate  guarantee  of  the  payment  of  assessments  had  been 
obtained.  Fixed  charges  by  the  new  plan  were  lower,  as  a  result 
of  the  liberal  use  of  stock  in  the  exchanges  and  the  cancellation  of 
floating  debt  as  above ;  while  the  terms  under  which  the  outstanding 


ERIE  71 

New  York,  Pennsylvania  &  Ohio  bonds  were  retired  were  the  most 
drastic  part  of  the  scheme.  In  all,  the  total  mortgage  indebted- 
ness of  the  Erie  Company  and  its  leased  or  controlled  lines  of 
$234,680,180  for  January,  1896,  was  reduced  to  $137,704,100  by 
June  30  of  that  year.1 

A  weak  point  in  the  plan  was,  nevertheless,  the  small  reduction  in 
bonded  indebtedness  which  it  occasioned.  Although,  to  repeat,  the 
bonded  indebtedness  of  the  system  was  reduced  from  $234,680,180 
to  $137,704,100,  the  shrinkage  was  more  apparent  than  real,  since 
it  consisted  chiefly  in  the  exchange  of  stock  for  New  York,  Penn- 
sylvania &  Ohio  mortgage  bonds,  on  which  interest  had  not  been 
paid  by  the  Erie,  and  but  seldom  by  the  New  York,  Pennsylvania, 
&  Ohio  itself.  These  securities  were  slashed  hi  most  drastic  fashion, 
particularly  such  of  them  as  were  inferior  to  the  first  mortgage. 
The  amount  of  the  reduction  in  the  volume  outstanding  is  indi- 
cated by  the  fact  that  for  $5000  first  mortgage  New  York,  Penn- 
sylvania &  Ohio  bonds  were  given  $1000  Erie  prior  lien  bonds,  $500 
Erie  first  preferred,  $100  Erie  second  preferred,  and  $750  Erie 
common  stock ;  and  for  $500  second  mortgage,  or  for  $1000  third 
mortgage,  were  given  $100  Erie  common  stock.  If,  now,  we  exclude 
the  New  York,  Pennsylvania  &  Ohio  bonds  from  our  consideration 
of  the  funded  debt,  we  find  the  indebtedness  of  the  Erie  system 
on  January  i,  1896,  excluding  the  non-assumed  New  York,  Pennsyl- 
vania &  Ohio  bonds  to  have  been  $121,399,431 ;  and  on  June  30, 
excluding  the  new  prior  lien  bonds  used  to  exchange  for  these 
securities,  to  have  been  $123,304,100;  or  an  increase  through  the 
reorganization  of  $i, 904,669. 2  Further,  there  was  an  accompanying 
increase  in  the  capital  stock  of  the  combined  companies,  which 
did  not,  of  course,  involve  an  increase  in  fixed  charges,  but  which 

1  Chron.  61:368,  1895;  R.  R.  Gaz.  27:  583-4,  1895. 

2  The  following  was  the  rate  of  exchange  of  Erie  securities  for  New  York,  Penn- 
sylvania &  Ohio  securities  on  payment  by  the  latter  of  $12  per  new  share: 

Old  securities  To  be  exchanged  jor 

in  amounts  of               Prior  Lien  Bonds   ist  Prej.  2d  Prej.        Com.  Stock 

ist  mortgage,    $5,000  $1000                $500                $100                $75° 

2d  mortgage,          500  100 

3d  mortgage,       1,000  100 

Pref.  Stock,         6,000  100 

Com.  Stock,      10,000  100 


72  RAILROAD  REORGANIZATION 

increased  the  volume  of  securities  outstanding.1  What  the  reduction 
in  the  capital  of  the  New  York,  Pennsylvania  &  Ohio,  joined  with 
its  amalgamation  with  the  Erie  system,  did  do  was  to  lessen  the 
burdens  of  that  line  to  the  parent  company.  For  many  years  the 
Erie  had  engaged  to  operate  the  branch  for  68  per  cent  and  had  paid 
32  per  cent  of  its  gross  earnings  to  the  New  York,  Pennsylvania  & 
Ohio,  to  be  applied  to  payment  or  partial  payment  of  interest  on 
the  excessive  issues  which  were  now  retired.  It  was  probably  to  be 
long  before  an  operating  ratio  of  68  per  cent  could  be  successfully 
maintained ;  but  the  Erie  after  reorganization  was  obliged  to  turn 
over,  not  32  per  cent  of  gross  earnings,  but  4  per  cent  on  the 
$14,400,000  prior  lien  bonds  which  had  been  given  for  New  York, 
Pennsylvania  &  Ohio  securities,  or  an  amount  of  $576,000;  which 
amounted  to  a  reduction  of  the  minimum  rental  of  more  than  one- 
half,  and  of  the  sums  actually  paid  of  almost  three-quarters.2 

Turning  again  to  fixed  charges,  we  find  them  estimated,  after 
the  first  two  years,  at  $7,850,000.  The  average  net  earnings  for 
the  period  1887-94  had  been  $9,331,250.  These  earnings  will  not 
serve  strictly  as  a  basis  for  calculation,  for  from  1887  to  1892  they 
include  an  average  of  perhaps  $750,000  derived  from  Lehigh  Val- 
ley trackage  payments  and  other  sums  now  discontinued.  With 
the  deduction,  therefore,  of  this  amount  from  the  net  earnings  of  the 
period  named,  the  average  is  reduced  to  $8,768,750;  or  $918,750 
more  than  it  was  thought  fixed  charges  would  be.  When  it  is 
considered  that  this  $918,750  represented  the  sum  available  for 
dividends  on  $146,000,000  of  outstanding  Erie  stock,  it  is  plain  that 
the  over-capitalization  of  the  company  in  1895  was  still  very  great. 

With  these  comments  it  is  necessary  to  leave  the  plan.  It.  was  far 
the  best  that  had  ever  been  applied  to  the  rehabilitation  of  Erie's 

1  Capital  Stock  — 

Before  reorganization  Common  Preferred 

Erie,  $77,837,000  $8,536,600 

.„— N.  Y.,  P.  &  O.,  34,999,350  10,000,000 

$112,836,350  $18,536,600 
After  reorganization 

I      Erie,  $100,000,000  $46,000,000 

Nypano,  20,000,000 

$i  20,000,000  $46,000,000 

2  This  real  rental   was  increased  somewhat  by  the  assumption  of  New  York, 
Pennsylvania  &  Ohio  prior  liens. 


ERIE  73 

affairs;  it  was  discriminating  in  its  nature,  and,  thanks  to  the 
increasing  prosperity  of  the  last  eleven  years,  it  has  been  fortunate 
in  its  results.  In  August,  1895,  a  decree  of  foreclosure  was  signed  in 
the  city  of  New  York,  and  the  following  November  the  property  was 
sold  under  the  second  consolidated  mortgage,  and  purchased  by  the 
reorganization  committee  for  $20,000,000. * 

Since  1895  the  Erie  has  shared  in  the  prosperity  of  the  country. 
Its  ton  mileage  has  increased  from  3,939,679,175  in  1897  to  6,275,- 
629,877  in  1907;  its  gross  earnings  have  grown  from  $31,497,031 
to  $53,914,827 ;  and  its  net  earnings,  which  had  hovered  for  so  many 
years  near  or  below  the  level  of  fixed  charges,  have  now  soared  away 
above.  Under  these  circumstances  it  is  but  natural  that  large  sums 
should  have  been  applied  to  improvements.  Between  December  i, 
1895,  and  June  30,  1907,  $12,732,486  were  spent  in  the  purchase 
of  land,  in  yards,  stations,  and  buildings,  hi  reducing  grades,  re- 
locating tracks,  and  in  other  ways,  and  charged  to  capital;  $36,511,- 
046  were  spent  for  new  equipment,  and  charged  to  capital;  and 
$8,625,307  were  taken  from  income  for  equipment  and  improve- 
ments of  various  sorts.  These  expenditures  have  had  a  most  gratify- 
ing result.  The  average  train  load  has  grown  from  224.74  tons 
in  1895  to  471.67  in  1907,  although  coal  now  constitutes  a  smaller 
proportion  of  the  freight;  and  the  average  revenue  per  train  mile 
has  more  than  doubled,  in  face  of  a  revenue  per  ton  mile  which  has 
only  slightly  increased.  In  1907  the  Erie's  ton  mileage  was  59  per 
cent  greater  than  in  1897,  and  its  passenger  mileage  was  73  per  cent 
greater,  but  the  expense  of  conducting  transportation  had  increased 
but  27  per  cent.  Instead  of  freight  cars  with  an  average  capacity  of 
22 J  tons  the  company  now  uses  cars  which  average  34  tons.  In- 
stead of  locomotives  which  on  the  average  could  exert  a  tractive  force 
of  only  24,500  pounds  as  late  as  1901,  ft  has  now  engines  which 
average  31,000.  Freight  train  mileage  is  2,600,000  less  than  it  was 
in  1896,  and  passenger  train  mileage  has  only  slightly  increased. 

And  yet,  with  all  this  prosperity,  it  cannot  be  said  that  the  Erie 
enjoys  an  assured  position.  In  1907  it  had  to  pay  out  89  per  cent 
of  the  largest  income  which  it  had  ever  received  for  operating 
expenses,  fixed  charges,  and  taxes.  Of  its  net  income  of  about 
$6,000,000  the  modest  dividends  of  4  per  cent  on  its  first  and  second 

1  Chron.  61:831,  1895. 


74  RAILROAD  REORGANIZATION 

preferred  stock  absorb  some  $2,500,000,  and  the  widespread  finan- 
cial difficulties  of  1907  have  led  its  management  to  declare  the  divi- 
dends for  that  year  payable  in  scrip  and  not  in  cash.  And  although 
the  present  period  of  reaction  dates  back  but  a  little  way  the  company 
has  been  already  obliged  to  the  issue  of  short  term  notes. 

In  matters  of  railroad  policy  the  Erie  has  accordingly  been  con- 
servative. In  1898  it  acquired  control  of  the  New  York,  Susque- 
hanna  &  Western,  from  New  York  City  to  Wilkesbarre  in  north- 
east Pennsylvania.  Three  years  later  it  bought  the  entire  stock  of 
the  Pennsylvania  Coal  Company  in  order  to  protect  its  tonnage,  and, 
as  the  directors  expressed  it,  for  other  reasons  which  seemed  good ; 
and  in  1901  also  it  bought  an  interest  in  the  Lehigh  Valley.  The 
most  sensational  episode  which  has  occurred  has  been  the  purchase 
and  subsequent  release  of  the  Cincinnati,  Hamilton  &  Dayton.  It 
seems  that  in  1905  Mr.  J.  P.  Morgan  bought  a  majority  of  a  syndi- 
cate's holdings  in  Cincinnati,  Hamilton  &  Dayton  stock,  amount- 
ing to  a  majority  of  the  total  issue ;  a  purchase  which  carried  control 
of  the  Pere  Marquette  and  of  the  Chicago,  Cincinnati  &  Louis- 
ville, or  of  a  total  system  of  3675  miles.  This  stock  Mr.  Morgan 
turned  over  to  the  Erie  at  a  price  reported  to  be  $160  a  share.  From 
a  traffic  point  of  view  the  deal  seemed  likely  to  strengthen  the  Erie's 
position  in  Ohio,  Indiana,  and  Michigan,  while  more  than  doubling 
the  mileage  of  its  system.  Because  of  the  financial  condition  of  the 
new  companies,  however,  the  purchase  was  decidedly  unwise ;  and, 
after  an  investigation,  Mr.  Morgan's  offer  to  take  the  road  off  the 
Erie's  hands  was  gladly  accepted.  On  December  4, 1905,  Mr.  Judson 
Harmon  was  appointed  receiver  of  the  Cincinnati,  Hamilton  & 
Dayton  and  of  the  Pere  Marquette,  and  the  reorganization  of  these 
properties  is  just  being  completed. 

At  present  the  Erie  is  operating  2169  miles  of  road  as  against 
2166  in  1896.  Its  earnings  have  greatly  increased,  its  capitalization 
has  grown  in  less  proportion,1  but  it  has  not  yet  a  sufficient  margin 
of  surplus  earnings  to  meet  a  decline  in  prosperity  without  serious 
misgivings.  Dividends  on  its  first  preferred  stock  have  been  paid 
since  1901,  and  on  its  second  preferred  since  1905.  The  common 
stock  cannot  expect  a  dividend  in  any  period  which  can  be  foreseen. 

1  Capital—  Stock  Bonds 

1896  $146,000,000  $137,704,100 

1907  176,271,300  209,633,900 


CHAPTER  III 
PHILADELPHIA  &  READING 

Early  history  —  Purchase  of  coal  lands  —  Funding  of  floating  debt  —  Failure  — 
Struggles  between  Gowen  and  his  opponents  —  Reorganization  —  Second  failure 
and  reorganization. 

THE  Philadelphia  &  Reading  Railroad  has  been  peculiarly  unfor- 
tunate. Although  serving  a  region  of  abundant  traffic,  it  failed  three 
times  between  1880  and  1895,  and  was  in  the  hands  of  receivers  ten 
years.  It  was  reorganized  after  each  failure,  and  each  reorganization 
was  marked  by  bitter  struggles  between  contending  parties,  due  in  part 
to  divergence  in  financial  interests,  and  hi  part  to  personal  rivalries. 

In  1833  the  Philadelphia  &  Reading  Railroad  was  chartered  by 
the  Legislature  of  Pennsylvania  to  build  a  road  from  Philadelphia 
to  Reading,  a  distance  of  58  miles.  Its  early  history  does  not  con- 
cern us.  In  1862  it  leased,  owned,  and  operated  437.4  miles  of  track, 
equivalent,  roughly,  to  119.4  miles  of  line;  and  derived  $2,879,419 
out  of  its  gross  earnings  of  $3,911,830  from  the  carriage  of  coal. 
Its  capitalization  was  extremely  high,  roughly,  $193,417  per  mile  of 
line,1  and  the  necessary  payments  each  year,  not  including  dividends, 
took  up  $1,454,635.  At  this  time  the  road  owned  no  coal  lands,  but, 
like  the  Lehigh  Valley  Railroad  and  the  Schuylkill  Canal,  remained 
a  common  carrier,  and  relied  upon  the  advantages  of  its  position  in 
respect  to  the  Southern  coal  fields  to  secure  the  tonnage  which  it 
required. 

From  1862  to  1865  inclusive  the  Reading  enjoyed  a  period  of 
extreme  prosperity.  The  Navy  Department,  during  the  war,  re- 
quired large  quantities  of  fuel,  and  in  the  revival  of  business  after 
the  conclusion  of  peace  the  Reading  took  its  part.  Merchandise 
earnings  increased  from  $523,416  in  1862  to  $1,165,277  in  1865; 
coal  earnings  from  $2,879,419  to  $8,627,292;  and  though  expenses 

1  Calculated.  Poor  gives  the  figure  of  340.3  miles  of  track.  In  1867  the  miles  of 
track  were  reported  as  418.1,  and  the  miles  of  line  as  147,  the  latter  being  35.1  per 
cent  of  the  former.  Supposing  the  proportion  to  have  been  the  same  in  1862,  to 
340.3  miles  of  track  there. would  have  been  119.4  miles  of  line,  which,  divided  into 
a  capital  of  $23,094,829,  gives  $193,417. 


76  RAILROAD  REORGANIZATION 

also  increased,  yet  net  earnings  grew  from  $2,375,247  to  $5,236,655, 
and  the  balance  of  earnings,  after  all  charges  had  been  paid,  from 
$920,612  to  $2,632,566.  Dividends  meanwhile  ranged  from  14  per 
cent  on  the  preferred  stock  in  1862  to  10  per  cent  on  both  preferred 
and  common  in  1866,  though  the  majority  of  the  distributions  were 
made  in  stock.  On  the  whole,  during  the  Civil  War  and  for  a  whole 
year  afterwards,  the  Reading  was  able  to  carry  without  difficulty 
the  burden  of  an  enormous  capitalization.  What  increase  in  capital 
occurred  at  this  time  was  in  stock,  and  did  not  add  to  the  load, 
although  the  desire  to  pay  dividends  on  the  increased  stock  led  to 
the  piling  up  of  new  issues. 

In  1869  an  entirely  new  departure  in  Reading  policy  occurred. 
Whereas  the  road  had  previously  owned  no  coal  lands,  with  the 
advent  of  Mr.  F.  B.  Gowen  to  the  presidency  it  began  to  purchase 
on  an  enormous  scale.  "The  repeated  and  serious  interruptions  of 
the  business  of  the  company,"  said  the  annual  report  for  1871, 
"caused  by  strikers  in  the  coal  regions  during  the  last  few  years, 
and  the  many  fluctuations  in  the  coal  trade,  produced  by  alternate 
periods  of  expansion  and  depression  resulting  therefrom,  have  at- 
tracted the  attention  of  the  managers  of  the  company  to  the  neces- 
sity of  exercising  some  control  over  the  production  of  coal,  so  as  to 
prevent  a  recurrence  of  the  difficulties  heretofore  experienced ;  and 
it  was  believed  that  the  best  way  to  accomplish  this  result,  without 
injuriously  affecting  individual  interests,  was  for  the  company  to 
become  the  owner  of  coal  lands  situate  upon  the  line  of  its  several 
branches."  1  Further,  it  was  felt  that  some  steps  were  necessary  to 
retain  for  the  Reading  even  the  coal  tonnage  which  it  enjoyed.  In 
1871  every  rival  carrier  had  invested  large  sums  in  coal  properties, 
and  all  the  fields  but  the  Schuylkill  and  Mahanoy  (western  middle) 
were  occupied,  while  carriers  had  begun  to  enter  the  Mahanoy 
district,  and  it  was  reported  to  be  their  intention  to  build  lines 
straight  through  to  the  Schuylkill  fields. 

The  anthracite  coal  regions  of  Pennsylvania  lie  in  four  main 
districts:  the  Northern  or  Wyoming;  the  Southern  or  Schuylkill; 
and  two  smaller  intermediate  fields  known  respectively  as  the  Eastern 
Middle  or  Lehigh  region  and  the  Western  Middle  or  Mahanoy  and 
Shamokin  basins.  The  Northern  field  is  the  more  easily  worked, 

1  Annual  Report,  1881,  p.  63. 


PHILADELPHIA   &  READING  77 

and  the  Southern  field  is  the  richer.1  Between  1869  and  1881  the 
Reading  Railroad  and  its  alter  ego,  the  Coal  &  Iron  Company, 
formed  for  the  purpose,  spent  $73,326,668  for  lands  in  the  Schuyl- 
kill  and  Western  Middle  districts,  securing  142  square  miles,  or  60 
per  cent  of  all  the  anthracite  lands  of  these  districts,  and  30  per  cent 
of  all  in  Pennsylvania.  Of  the  purchase  money  $69,816,204  were 
supplied  either  by  the  Railroad  Company  or  by  sale  of  Coal  &  Iron 
Company  bonds  which  the  Railroad  Company  guaranteed.  The 
Coal  &  Iron  Company  incurred  non-guaranteed  liabilities  for  the 
rest.2  This  gave  ample  resources  for  the  permanent  supply  of  coal 
tonnage  to  the  railroad,  and  was  sufficient  also  to  give  a  considerable 
measure  of  control  over  production  in  the  Southern  district.  Inde- 
pendent operators  did  continue,  however,  and  the  Reading  coal  was 
subject  to  the  competition  of  coal  from  other  fields.  More  import- 
ant still,  in  attaining  control,  "all  kinds  of  coal  properties,  good,  bad, 
and  indifferent,  were  purchased  without  regard  to  original  cost, 
location,  or  revenue  producing  capacity."  3  In  1880  an  engineer  of 
reputation  was  appointed  to  evaluate  the  Reading  coal  lands,  and 

1  Industrial  Commission,  vol.  19,  p.  445.    Area  of  fields  as  given  in  Annual  Report 
for  1881  was:  Schuylkill,  146  sq.  miles ;  Western  Middle,  91  sq.  miles  ;  Lehigh,  37  sq. 
miles  ;  Wyoming,  198  sq.  miles. 

2  An  analysis  of  the  Coal  &  Iron  Company's  operations  in  1881  (Annual  Report, 
1881)  showed  that  there  had  been  expended: 

For  coal  and  timber  lands  and  leasehold  collieries,  and  for  dead 
work,  collier}'  equipments  and  improvements,  real  estate  and 
miners'  houses,  etc.,  $39,385,080 

For  stocks  and  bonds  and  loans  to  secure  the  control  of  tributary  pro- 
perties, 5,672,394 
For  iron  ore  lands,  iron  furnaces,  mills,  and  other  properties,  1,720,566 
For  profit  and  loss  account  in  working  properties,  including  interest 

payments,  etc.,  22,454,500 

For  supplies  and  miscellaneous  accounts,  1,485,426 

For  bills  and  accounts  receivable,  cash,  etc.,  2,608,702 

$73,326,668 

Of  which  amount  there  was  furnished  by  the  Railroad  Company,  54,886,647 

And  the  Coal  &  Iron  Company's  obligations  held  by  the  public,  for 
which  the  Railroad  Company  became  responsible  as  guarantor, 
amounted  to  14,929,557 

Other  direct  liabilities  of  the  Coal   &  Iron  Company  amounted  to  3,510,464 

$73,326,668 

3  Annual  Report,  1881. 


78  RAILROAD  REORGANIZATION 

recommended  the  surrender  of  five  properties  that  originally  cost 
$5,207,167,  upon  which  there  were  encumbrances  of  $5,015,000. 
"But  little  weight,"  said  he,  "should  be  given  to  the  fear  that  rivals 
will  possess  the  surrendered  property ;  most  of  it  is  not  a  tempting 
investment."  Exorbitant  prices  were  paid  for  the  lands  purchased. 
By  1881,  as  noted,  there  had  been  expended  in  all  by  the  two  Read- 
ing companies  $73,326,668.  This  same  report  said  that,  "assum- 
ing the  profit  on  the  future  coal  product  to  be  30  cents  per  ton  of  coal 
shipped,  that  the  company  will  be  able  to  reduce  the  rate  of  interest 
on  the  money  needed  to  hold  and  develop  the  property  from  7  per 
cent  to  6  per  cent  per  annum,  and  that  the  development  will  be  at 
the  rate  just  stated  [outlined  earlier  in  the  report],  the  whole  estate 
has  a  value  of  $32,394,799:  the  company's  interest  in  the  estate  is 
worth  $30,630,648,  and,  including  colliery  improvements  belonging 
to  the  company,  but  situate  on  lands  owned  by  others,  the  whole 
of  the  company's  property  is  worth  $31,197,484."  1 

It  is  unquestionable  that  the  Reading  did  acquire  an  enormously 
valuable  property  in  the  decade  succeeding  1870.  It  seems  just  as 
clear  that  it  paid  more  for  this  than  was  necessary ;  but  what  is  per- 
haps more  to  the  point  is  the  fact  that  the  Reading  paid  more  than 
it  could  afford.  Whatever  the  ultimate  advantages  to  be  gained  by 
exclusive  possession  of  any  considerable  section  of  the  coal  fields, 
the  Reading  was  not  large  enough  nor  financially  strong  enough  to 
make  such  vast  purchases  within  so  short  a  space  of  time.  The 
prosperity  of  the  Civil  War  had  disappeared,  net  profits  were 
fluctuating  without  marked  tendency  to  increase,  the  figures  for 
1870  being  actually  less  than  those  of  1863,  while  the  interest  on 
bonds  had  more  than  doubled  since  1867,  and  the  sum  required  for 
dividends  had  increased.  To  advance  $54,886,647  to  the  Coal  & 
Iron  Company  under  these  conditions,  and  to  become  responsible 
as  guarantor  for  $14,929,557  more,  would  have  been  ill-advised 
even  had  the  prices  paid  by  the  company  been  in  strict  accord  with 
the  commercial  estimate  of  the  time.  Under  the  best  of  circum- 
stances returns  from  much  of  the  property  acquired  could  not  be 
secured  for  many  years,  The  parts  of  the  coal  fields  which  were 
worked  yielded  an  income,  though  it  was  seldom  that  the  collieries 
were  allowed  to  run  to  their  full  capacity ;  but  those  districts  which 

1  Part  of  the  difference  was  due  to  the  inflation  of  the  currency  before  1879. 


PHILADELPHIA   &•   READING  79 

were  bought  for  the  sake  of  controlling  the  coal  situation,  or  in 
order  to  secure  a  future  reserve,  and  which  in  many  cases  could  not 
be  worked  at  existing  prices,  occasioned  a  drain  upon  the  company 
to  the  amount  of  interest  on  the  purchase  money,  with  no  return  of 
any  kind.  Moreover,  the  purchase  of  the  coal  lands  put  the  Read- 
ing in  the  anomalous  position  of  a  railroad  corporation  interested 
in  industrial  lines.  It  could  no  longer  be  content  with  encouraging 
the  transportation  of  its  main  source  of  revenue  (coal),  but  had  to 
care  as  well  for  the  price  at  which  this  coal  was  sold.  When  de- 
pression hi  the  coal  trade  came,  the  Reading  lost  both  as  producer 
and  as  carrier,  for  less  was  transported,  and  that  amount  was  sold 
at  a  lower  price;  but  when  good  times  came,  from  which  as  a 
simple  carrier  it  might  have  profited  largely,  it  struggled  with  con- 
ditions of  over-production  which  should  rightly  have  been  none  of 
its  concern.  There  was,  finally,  a  peculiar  fatality  in  the  time  which 
the  Reading  chose  for  its  expansion.  The  year  1873  will  always 
be  remembered  as  one  of  the  most  disastrous  in  the  history  of  the 
United  States.  Commencing  with  the  failure  of  Messrs.  Jay  Cooke 
&  Co.  on  the  i8th  of  September,  the  panic  spread  with  such  rapidity 
as  to  lead  to  the  closing  of  the  New  York  Stock  Exchange  on  Sep- 
tember 30.  All  railroad  securities  were  exceedingly  depressed,  call 
loans  were  high,  and  it  was  nearly  impossible  to  secure  new  capital. 
Business  the  next  five  years  was  very  dull,  and  the  Reading  actually 
earned  less  gross  in  1879  than  in  the  year  before  the  panic,  and  this 
at  the  very  time  that  its  liabilities  were  so  largely  extended.  The 
natural  result  was  the  financial  difficulty  which  can  be  detected  as 
early  as  1876.  In  June  it  appears  that,  owing  "to  the  continued 
depression  in  the  iron  and  coal  trades  and  the  consequent  falling  off 
in  transportation,"  the  road  was  obliged  to  reduce  its  working  force. 
In  July  the  usual  dividend  was  passed ;  salaries  were  lowered  in 
September,  and  still  later  a  temporary  loan  was  secured  to  tide  over 
the  floating  debt,  which  then  amounted  to  $8,272,359.  By  the  next 
year  the  matter  had  become  serious  enough  to  necessitate  a  formal 
proposition  to  creditors  for  the  postponement  of  interest  payments 
and  of  payments  on  the  floating  debt.  The  company  professed 
itself  able  to  carry  out  the  following: 

(a)  To  pay  the  interest  on  prior  liens  in  full. 

(b)  To  pay  one-half  the  interest  on  the  general  mortgage  bonds 


8o  RAILROAD  REORGANIZATION 

and  on  the  Perkiomen  sterling  mortgage  bonds  for  three  years  in 
cash,  and  one-half  in  five-year  interest-bearing  scrip,  with  the  option 
to  the  holder  of  receiving  instead  scrip  for  the  three  coupons  first 
maturing  and  cash  for  the  rest. 

(c)  To  pay  for  five  years  in  scrip  the  interest  on  the  debenture 
bonds  of  both  the  Railroad  and  Coal  &  Iron  Companies ;  the  con- 
vertible bonds  of  the  Railroad  Company,  the  bonds  due  in  1885, 
1902,  and  1918  of  the  Tidewater  &  Susquehanna  Canal  Company, 
and  so  much  of  the  rent  due  to  the  Schuylkill  Navigation  Company 
as  was  applicable  to  the  payment  of  dividends  to  stockholders  of 
the  Company  and  to  the  interest  upon  its  mortgage  loan  of  1895. 

(d)  To  suspend  the  drawings  for  the  payments  of  sinking  funds 
and  of  the  improvement  and  general  mortgage  bonds  for  a  period 
not  exceeding  four  years,  if  so  long  a  time  should  be  required  for 
the  payment  of  the  floating  debt.1 

"The  relief  to  be  obtained  from  the  above,"  said  President  Go  wen, 
"will  undoubtedly  enable  the  managers,  even  with  no  improvement 
in  traffic  or  increase  of  rates,  to  meet  the  fixed  charges  on  all  obliga- 
tions of  both  companies  other  than  those  above  named,  and  to  pay 
off  the  entire  floating  debt  within  such  time  as  will  be  satisfactory 
to  the  holders  thereof."  Certain  modifications  were  suggested  by  the 
London  securityholders,  providing  for  trustees  with  some  power  to 
protect  the  creditors,2  and  the  plan  went  quietly  into  effect. 

From  now  on  matters  went  from  bad  to  worse.  The  year  1878 
showed  a  falling  off  in  almost  every  source  of  revenue,  while  ex- 
penses and  charges  remained  very  nearly  the  same.  Depression  in 
the  coal  trade  and  connection  with  the  Coal  &  Iron  Company,  gen- 
eral dulness  of  business  after  1873,  troubles  with  employees,  over- 
capitalization, all  had  their  share  in  pushing  the  company  still  fur- 
ther into  the  mire.  It  became  unable  to  keep  its  share  of  the  existing 
business,  and  the  percentages  of  the  Schuylkill  output  carried  by  it 
steadily  decreased  from  83.49  in  1877  to  75.45  in  1881,  while  its  per- 
centage of  the  aggregate  output  from  all  the  anthracite  region  dimin- 
ished from  32.82  to  24.44.  "It  appears,  therefore,"  said  the  annual 
report  for  1881,  "that  while  other  companies  have  steadily  increased 
their  capacity  of  production  by  regular  and  judicious  expenditures 

1  R.  R.  Gaz.  9:  225,  1877;  Ibid.  9:  146,  1877. 

2  Ibid.  9:  284,  1877. 


PHILADELPHIA   6-   READING  8 1 

for  new  openings,  breakers,  machinery,  and  other  facilities  for 
mining  and  delivering  coal,  the  Reading  Company  has  apparently 
remained  stationary.  .  .  .  For  this  policy  the  local  officers  in 
charge  are  not  probably  responsible,  as  it  was  undoubtedly  forced 
upon  them  by  the  management,  because  of  the  impoverished  and 
embarrassed  condition  of  the  company's  finances."  * 

Throughout  1879  there  was  trouble  over  the  payment  of  wages, 
perhaps  as  good  a  sign  of  financial  difficulty  as  can  be  desired. 
Employees  were  paid  in  scrip,  not  cash,  and  even  scrip  wages  were 
left  overdue.  President  Go  wen  went  to  Europe  toward  the  middle  of 
the  year,  but  not  at  all,  as  he  carefully  explained,  in  order  to  place 
a  new  loan,  or  to  transact  any  business  except  a  little  in  relation  to 
some  railroads  for  the  company ;  hi  fact,  the  condition  of  the  Reading 
was  an  open  secret,  and  new  loans  were  impossible  to  obtain.  In 
May,  1880,  the  New  York  and  Philadelphia  banks  began  to  refuse 
further  accommodations.  At  the  same  time  the  period  during  which, 
according  to  the  agreement  of  1877,  cash  payment  of  general 
mortgage  coupons  was  suspended,  drew  to  a  close,  and  on  May  21 
the  Philadelphia  &  Reading  announced  its  inability  to  meet  its 
obligations.  As  was  said  at  the  time,  the  company  did  not  fall  with 
a  crash  because  it  had  not  far  to  fall. 

The  failure  occurred  on  May  21,  and  on  May  24  Messrs.  F.  B. 
Go  wen  (president  of  the  company),  Edwin  A.  Lewis,  and  Stephen 
A.  Caldwell  were  appointed  receivers.  Their  resources  were  scanty 
and  they  had  to  do  with  them  as  best  they  could.  On  the  one  hand 
they  applied  to  the  court  for  authority  to  borrow  $1,000,000  to  pay 
the  wages  of  employees  and  interest  falling  due  July  i,  and  on  the 
other  they  cut  down  expenses  by  reducing  the  working  force  in  the 
repair  shops,  by  putting  the  shops  on  short  time,  by  discontinuing 
many  of  the  trains  on  different  lines,  and  by  ceasing  all  dead  work 
at  the  collieries. 

Before  any  plan  could  be  proposed  for  the  rehabilitation  of  the 
company  the  condition  of  its  finances  had  to  be  known,  and  this 
again  the  receivers  took  in  charge.  Their  report  in  June,  1880, 
showed  a  sufficiently  serious  state  of  affairs.  The  floating  debt  of 
the  Railroad  Company  had  mounted  up  to  $10,254,766,  besides 
$1,900,482  more  for  the  Coal  &  Iron  Company.  This  represented 

1  Annual  Report,  1881,  p.  28. 


82  RAILROAD  REORGANIZATION 

an  increase  of  $3,604,000  as  compared  with  November  30,  1879,  and 
an  English  bondholders'  committee  declared  that  only  $2,930,000 
of  it  were  represented  by  value.1  The  rest  had  apparently  been 
incurred  in  desperate  attempts  to  preserve  the  solvency  of  the 
company.  The  total  liabilities  of  the  Railroad  and  Coal  &  Iron 
Companies,  including  mortgage,  debenture  debt,  floating  debt,  and 
miscellaneous  items,  but  excluding  stock,  were  $152,436,890.  The 
deduction  from  these  figures  of  the  Coal  &  Iron  bonds  held  by  the 
Railroad  Company,  which  would  have  constituted  a  duplication  of 
indebtedness,  left  a  total  of  $106,215,830. 

The  stock  of  the  two  companies  amounted  to  $42,278,175,  and 
the  stock  in  the  hands  of  the  public  to  $39,278,175.  The  grand 
total  of  liabilities  was  thus  the  enormous  sum  of  $145,494,005.  The 
charges  for  interest  and  sinking  funds  were  $7,542,094,  and  the 
annual  payment  of  $5,629,764,  due  on  $87,558,482  of  railroad 
bonded  indebtedness,  shows  that  the  rate  of  interest  upon  the  bonds 
was  high.  The  net  revenue  was  $5,494,979,  and  there  was  therefore 
a  deficit  of  $2,047,115.  Meanwhile  the  Coal  &  Iron  Company  had 
reported  a  regular  deficit  up  to  1880,  which,  though  not  significant 
in  itself,  because  of  close  relations  with  the  Railroad  Company  and 
the  impossibility  of  determining  how  much  the  Coal  Company's 
rightful  profits  were  reduced  by  exorbitant  transportation  rates, 
yet  made  it  very  clear  that  from  this  source  the  Railroad  Company 
could  expect  no  aid  toward  the  cancellation  of  the  railroad  deficit 
revealed. 

The  combined  companies  were  unable  to  earn  their  fixed  charges : 
the  continuation  of  the  struggle  to  do  so  was  sure  to  mean,  as  it 
had  in  the  past,  merely  a  piling  up  of  the  floating  debt.  The  coupon- 
funding  scheme  of  1877  had  shown  the  inevitable  result  of  tem- 
porary measures  of  relief;  and  though  business  in  1880  was  rapidly 
improving,  there  was  need  for  a  radical  reduction  in  the  burden 
resting  upon  the  company.  Pending  action,  a  bill  for  foreclosure 
was  introduced  under  the  general  mortgage  of  i874.2  A  valuation 
of  the  Reading  coal  properties,  to  which  reference  has  already  been 
made,  was  started.  It  was  entrusted  at  first  to  Mr.  S.  B.  Whitney, 

1  Chron.  31 :  46,  1880,  Report  of  the  English  Bondholders'  Committee,  June  18, 
1880.  This  committee  was  in  the  interests  of  the  Messrs.  McCalmont. 

2  Ry.  Age,  5:365,  1880. 


PHILADELPHIA   &  READING  83 

chief  engineer  of  the  Coal  &  Iron  Company,  and  to  Mr.  Frank 
Carver,  the  land  agent;  but  was  later  given  over  to  Mr.  Joseph  S. 
Harris,  chief  engineer  of  the  Lehigh  Coal  &  Navigation  Company, 
in  order  to  have  the  opinion  of  an  unprejudiced  expert.1 

The  first  suggestion  for  a  plan  of  reorganization  came  from 
England.  The  consolidated  mortgage,  prior  to  the  general  mortgage, 
was  to  be  foreclosed ;  general  mortgage  bonds  were  to  be  deprived 
of  their  right  to  sue  or  to  foreclose ;  all  unsecured  bonds  and  junior 
mortgages  were  to  be  exchanged  for  preferred  stock;  and  a  $15 
assessment  was  to  be  levied  upon  the  stock,  for  which  collateral 
trust  7  per  cent  bonds  were  to  be  given.  This  assessment  was  relied 
on  to  pay  off  the  floating  debt,  and  the  new  company  was  to  start 
free,  with  but  $33,564,00x5  of  mortgage  indebtedness.2 

This  plan  was  a  step  in  the  right  direction.  It  recognized  the 
validity  of  prior  liens,  followed  a  sound  principle  hi  providing  for 
the  floating  debt  by  assessments  upon  the  stock,  and  relieved  the 
company  from  the  likelihood  of  a  future  failure  by  its  treatment 
of  the  general  mortgage  bonds ;  but  it  was  weak  in  that  it  reduced 
the  general  mortgage  to  the  anomalous  position  of  a  bond  entitled 
to  a  fixed  return  without  the  power  to  enforce  it.  Stockholders, 
moreover,  objected  strenuously  to  the  assessment,  maintaining  that 
business  conditions  were  now  such  as  to  make  milder  measures 
sufficient. 

In  October,  1880,  Mr.  J.  W.  Jones,  formerly  vice-president  of  the 
Reading  Company,  urged  that  an  assessment  on  the  stock  was  not 
necessary,  and  proposed  the  following: 

(1)  To  convert  the  income,  debenture,  and  convertible  bonds 
and  scrip  into  second  preferred  stock  bearing  5  per  cent  interest 
if  earned; 

(2)  To  issue  $15,000,000  of  first  preferred  stock,  with  which  to 
retire  the  floating  debt ; 

(3)  To  scale  the  Coal  Company  mortgage  bonds  $200,000  per 
annum,  which  could  possibly  be  done  by  consent  of  holders,  if  not, 
then  by  foreclosure.3 

The  main  difference  between  this  and  the  English  scheme  lay  in 
the  treatment  of  the  floating  debt.  It  is  improbable,  however,  that 

1  R.  R.  Gaz.  12:  363,  1880.   2  Ry.  Age,  5:  351,  1880;  R.  R.  Gaz.  12:  350,  1880. 
3  R.  R.  Gaz.  12:  542,  1880. 


84  RAILROAD  REORGANIZATION 

the  substitute  which  this  plan  offered  would  have  been  sufficient, 
and  that  the  preferred  stock  could  have  brought  $66,  at  which  price 
alone  it  would  have  covered  the  floating  debt.  Reading  common 
stock  was  selling  hi  the  middle  of  the  month  at  i6|;  general  mort- 
gage 6s  were  bringing  only  74^,  while  debentures  and  convertible 
75  were  being  quoted  at  28  and  37  respectively. 

In  October  a  representative  of  the  English  bondholders  arrived 
in  Philadelphia  for  the  purpose  of  examining  into  the  condition 
of  the  company,  and  the  following  month  agreed  with  the  board  of 
managers  upon  a  reorganization  committee  to  act  in  the  United 
States.  "The  probabilities  are,"  said  this  gentleman  (Mr.  Thomas 
Wilde  Powell),  "that  it  will  be  found  that  the  bondholders  in  Lon- 
don will  be  willing  to  do  as  they  did  in  the  case  of  the  Erie,  that 
is,  fund  a  reasonable  number  of  coupons  ...  for  the  purpose  of  set- 
ting at  liberty  a  portion  of  the  revenue  to  pay  unfunded  claims."  1 
The  next  move  in  the  reorganization  of  the  company  came,  however, 
not  from  this  committee  but  from  President  Go  wen,  the  man  who 
had  led  the  Reading  into  the  purchase  of  coal  lands,  and  who  still 
remained  in  office  in  spite  of  the  hostility  shown  toward  him.  His 
scheme  comprised  two  parts:  the  first  an  issue  of  income  bonds 
with  which  to  pay  off  the  floating  debt  (together  with  $5,000,000 
mortgage  bonds);  the  second  a  grand  general  mortgage  to  retire 
existing  indebtedness.  The  plan  in  more  detail  was  as  follows: 

(1)  The  company  was  to  create  $34,300,000  deferred  income 
bonds,  on  which  interest  was  to  be  deferred  to  a  dividend  of  6  per 
cent  on  the  common  stock.   After  this  amount  had  been  paid  the 
bonds  were  to  take  all  revenue  up  to  6  per  cent  and  were  then  to 
rank  pari  passu  with  the  common  shares  for  further  dividends. 
The  debentures  were  to  be  issued  at  30  per  cent  of  their  par  value, 
or  $15  per  bond;  and  before  selling  or  disposing  of  said  bonds  in 
the  market  the  option  of  taking  a  pro  rata  share  was  to  be  first 
offered  to  the  stockholders  of  the  company.2 

(2)  A  more  permanent  relief  for  the  company  was  to  be  obtained 
from  the  proposal  to  issue  a  new  long  time  or  perpetual  5  per  cent 
funding  mortgage  of  $150,000,0x30,  divided  into  two  classes,  A  and 
B,  of  $75,000,000  each :  class  A  having  priority  of  lien  and  interest 
charge  over  class  B.  With  this  issue  it  was  proposed,  by  purchase 

1  R.  R.  Gaz.  12:  564,  1880.  2  Chron.  31:  536,  1880. 


PHILADELPHIA   &  READING  85 

or  exchange,  to  retire  all  outstanding  indebtedness,  and  to  acquire 
by  purchase  the  securities  of  the  companies  owning  the  leased  lines. 
It  was  estimated  that  $140,000,000  of  the  new  issue  would  provide 
for  all  of  this,  the  total  interest  on  which  would  be  $7,000,000,  as 
against  fixed  charges  for  interest,  sinking  funds,  and  rentals,  of 
$10,657,116,  making  an  annual  saving  of  $3,65 7,  H6.1  Mr.  Gowen 
did  not  expect  to  secure  so  large  an  annual  reduction,  owing  to  the 
impossibility  of  purchasing  the  higher  securities  and  the  probable 
appreciation  in  value  of  the  lower  ones ;  but  he  did  expect  to  realize 
in  all  a  saving  of  some  $2,700,000. 

In  part  this  plan  was  commendable ;  in  part  it  was  inadequate, 
and  in  part  it  relied  on  a  mere  juggling  with  words.  The  proposal  to 
unify  all  classes  of  indebtedness  by  a  grand  consolidated  5  per  cent 
mortgage  was  a  good  one,  both  in  the  simplification  of  accounts 
which  was  to  be  expected,  and  hi  the  reduction  in  fixed  charges  so 
far  as  this  reduction  went;  but  on  the  one  hand  a  reduction  of 
$2,700,000  in  charges  was  too  little  for  a  company  which  had  re- 
ported for  that  very  year  a  deficit  of  $2,000,000,  and  on  the  other 
hand  too  little  allowance  was  made  for  the  difficulty  of  forcing 
securityholders  without  a  foreclosure  sale  to  submit  to  a  definitive 
scaling  down  of  their  holdings,  with  not  even  a  preferred  stockTto 
show  for  the  sacrifice.  In  its  handling  of  the  floating  debt,  the  plan 
was  a  second  edition  of  Mr.  Jones's  stock-selling  scheme,  with  all 
the  good  points  left  out.  What  justification  there  could  have  been 
for  calling  securities,  such  as  the  deferred  incomes,  "  bonds,"  which 
were  to  be  issued  for  no  definite  time,  ranked  even  after  the  com- 
mon stock  for  dividends,  and  were  of  such  doubtful  character  that 
Mr.  Gowen  himself  proposed  to  sell  them  for  one-third  of  their 
face  value,  does  not  appear;  unless  it  be  that  the  lack  of  voting 
power,  itself  a  disadvantage,  entitled  them  to  the  more  respected 
name.  The  deferred  income  bonds  were  a  device  for  saddling  the 
holders  of  the  unsecured  debt  with  a  worthless  certificate  which 
they  might  be  induced  to  accept  because  of  its  name,  and  to  which 
not  even  the  Reading  stockholders  could  object.  Furthermore,  even 
if  the  creditors  had  been  eager  for  this  new  issue,  hi  itself  it  would 
not  have  been  sufficient.  The  issue,  if  taken  up,  would  have  yielded 
$10,200,000.  It  was  proposed  besides  to  sell  $5,000,000  of  unissued 

1  Chron.  31 :  607,  1880. 


86  RAILROAD  REORGANIZATION 

general  mortgage  bonds,  which,  after  the  success  of  the  deferred 
income  bonds,  it  was  presumed  would  sell  at  par.  Income  bonds 
and  general  mortgage  together  promised  a  total  of  $15,200,000,  or 
more  than  $1,000,000  over  cash  requirements  after  commissions 
had  been  paid.1 

However  poor  the  prospect,  there  was  no  lack  of  syndicate  guar- 
antee. In  November,  1880,  a  London  syndicate  agreed  to  deposit 
with  an  American  bank,  to  be  named  by  the  company,  the  sum  of 
$2,058,000,  to  be  forfeited  in  case  they  failed  to  take  at  the  issue 
price  all  deferred  income  bonds  not  taken  by  the  shareholders. 
This  syndicate  further  agreed  that  the  company  might  retain,  up  to 
$1,000,000,  out  of  the  deposit  money,  whatever  might  be  necessary 
to  make  up  a  second  instalment  of  $4  on  such  neglected  bonds.2 
Nothing  was  asked  from  the  company  in  return  except  the  chance 
to  sell  the  bonds  purchased  at  a  premium.  "As  long  as  the  bond- 
and  shareholders  find  the  money,"  remarked  the  London  Times, 
"there  is  nothing  to  be  said.  In  all  probability,  however,  these 
deferred  bonds  will  become  a  medium  for  the  very  worst  kind  of 
gambling,  and  their  chances  for  a  dividend  appear  to  us  to  be  very 
small."  3 

In  December  Mr.  Gowen's  plan  received  the  approval  of  the 
American  committee  and  of  the  board  of  managers  of  the  company. 
Bondholders  were  in  no  way  injured  by  the  worthlessness  of  the 
deferred  income  bonds,  and  only  the  most  far-sighted  could  be 
expected  to  have  demanded  a  larger  reduction  in  their  claims. 
The  same  month  a  meeting  of  London  bond-  and  shareholders 
passed  unanimously  a  resolution  expressing  confidence  in  President 
Gowen,  and  adopting  his  scheme.4  Opposition  came  from  the 
influential  London  banking  firm  of  McCalmont  Bros.,  and  the 
struggle  centred  about  the  annual  election  set  for  January  10,  1881. 
The  last  of  November  or  first  of  December  President  Gowen  issued 
a  circular  in  which  he  said:  "As  I  am  about  to  visit  Europe  on 
business  of  the  company,  and  as  it  is  possible  that  I  may  not  return 
until  the  first  week  in  January,  I  think  it  proper  to  call  your  atten- 
tion to  the  fact  that  it  is  highly  important  that  all  shareholders 
who  can  possibly  do  so  should  attend  the  annual  meeting  in  Phil- 

1  R.  R.  Gaz.  12:  609,  1880.  2  Ibid. 

3  Ibid.  13:  u,  1881.  *  Ibid.  12:  704,  1880. 


PHILADELPHIA   &  READING  87 

adelphia  on  the  second  Monday  in  January.  An  effort  will  undoubt- 
edly be  made  at  the  next  election  to  control  the  management  of  the 
company  in  the  interest  of  rival  lines,  and  if  the  effort  is  successful 
the  future  of  the  Philadelphia  &  Reading  Railroad  Company  will 
be  little,  if  any,  better  than  that  of  the  Philadelphia  &  Erie  Railroad 
Company,  or  of  the  Northern  Central  Railroad  Company."  l  In 
Europe,  or,  more  strictly  speaking,  hi  London,  Gowen  busied  him- 
self in  placing  his  deferred  income  bonds,  with  apparently  a  very 
considerable  measure  of  success.  As  to  the  result  of  the  coming 
election  he  professed  absolute  confidence.  It  made  little  difference, 
said  he,  which  way  the  McCalmonts  decided  to  vote  their  shares.  He 
could  be  elected  without  any  English  votes  at  all,  and  with  the  back- 
ing of  the  English  bondholders  who  had  resolved  to  support  him, 
the  matter  was  not  at  all  in  doubt.2  On  January  4,  six  days  before 
the  date  set  for  the  election,  Gowen  actually  issued  a  prospectus  for 
his  new  income  and  mortgage  loans,  and  cabled  to  Vice- President 
Keim  that  he  was  satisfied  that  he  could  dispose  of  the  general 
mortgage  A  bonds  at  no  and  the  general  mortgage  B  bonds  at  par.8 

Meanwhile  in  America  both  parties  had  recourse  to  the  courts: 
the  McCalmonts,  to  prevent  the  issue  of  the  deferred  income  bonds, 
and  the  friends  of  Mr.  Gowen  to  get  the  election  postponed  in  order 
to  give  the  president  time  to  return  from  Europe.  The  latter  suit 
was  the  first  decided.  Judge  McKennan,  of  the  United  States 
Circuit  Court,  refused  to  grant  an  order,  but  unofficially  advised 
postponement.  The  board  of  managers  therefore  withdrew  the  notice 
of  the  annual  meeting,  and  on  January  12  voted  to  postpone  it 
indefinitely.  Counsel  for  the  McCalmonts  then  made  application 
to  the  Court  of  Common  Pleas  in  Philadelphia  for  a  mandamus  to 
compel  the  board  to  call  a  meeting.  They  obtained  a  peremptory 
mandamus  on  January  24,  but  accepted  the  date  of  March  14  as 
satisfactory,  and  forbore  further  proceedings. 

The  matter  of  the  deferred  income  bonds  was  complicated  by 
a  full  and  complete  authorization  which  Mr.  Gowen  had  before  ob- 
tained from  the  Circuit  Court  for  the  issue  of  his  bonds.  The  request 
of  the  McCalmonts  was  twofold :  the  court  was  prayed  to  revoke  the 
previous  decree,  and  to  enjoin  any  further  action  in  the  negotiation 
or  consummation  of  the  said  scheme ;  or,  failing  this,  to  direct  the 

1  R.  R.  Gaz.  12:  652,  1880.    J  Ibid.  12:  704,  1880.   3  Ibid.  13:  n,  1881. 


88  RAILROAD  REORGANIZATION 

officers  of  the  company  and  the  receivers  to  refrain  from  the  issue 
of  the  bonds  until  the  form  thereof  should  have  been  settled  by  the 
said  court,  and  also  until  deposit  with  the  receivers  should  have 
been  made  of  the  $2,058,000  provided  as  a  guarantee.1  The  first 
request  sought  a  prohibition  of  the  issue ;  the  second  attempted  to 
delay  the  negotiation  of  the  bonds  until  the  annual  election  should 
have  passed  and  the  McCalmonts  should  have  had  a  chance  to 
obtain  control.  The  immediate  result  was  the  transference  to  Phil- 
adelphia of  the  $2,058,000  guaranteed,  from  its  place  of  deposit  in 
London.  In  February  the  McCalmonts  obtained  a  revocation  of  the 
original  grant  of  authority  for  the  deferred  income  bonds,  a  con- 
tinuance of  the  suit  for  a  preliminary  injunction,  and  an  order  re- 
straining the  respondents  from  "  making  any  agreement  or  ordering 
any  act  by  which  the  Philadelphia  &  Reading  Railroad  Company 
[might]  be  definitely  bound  touching  the  deferred  bond  plan  or 
the  proposed  mortgage  loan  of  $150,000,000."  2 

In  January  the  Coal  &  Iron  Company  quietly  held  its  annual 
election,  and  chose  Mr.  Gowen  president.  As  the  time  for  the  post- 
poned election  of  the  Railroad  Company  came  round,  the  activity 
of  both  sides  became  intense.  Both  Gowen,  who  was  still  in  London, 
and  the  McCalmonts  issued  calls  for  proxies.  The  former  appealed 
to  the  shareholders  to  save  the  property  from  passing  into  the  hands 
of  the  Pennsylvania  Central  Railroad  Company,  which  he  said  was 
believed  to  be  the  ruling  power  behind  the  McCalmont  litigation. 
The  latter  objected  vigorously  to  this  charge,  and  pointed  out  that 
the  Reading  managers  held  only  16,500  shares  of  the  company's 
stock,  and  that  some  of  them  had  barely  enough  to  qualify  them  for 
the  positions  which  they  held.3  The  McCalmonts,  furthermore, 
applied  to  the  courts  for  an  injunction  to  prevent  Gowen  from  voting 
on  the  shares  pledged  as  collateral  for  the  floating  debt.  They 
maintained  with  some  justification  that  these  shares  could  not 
legally  be  voted,  and  that  it  was  particularly  illegal  for  the  pre- 
sident to  use  them  to  elect  himself.4 

On  March  12  the  Court  of  Common  Pleas  issued  a  decree  regu- 
lating the  conditions  under  which  the  election  should  be  held,  pro- 
viding for  the  separate  count  of  votes  of  shares  transferred  three 

1  R.  R.  Gaz.  13:  25,  1881.  2  Chron.  32:  206,  1881. 

8  R.  R.  Gaa.  13:  43.  l8Sl-  4  R-  R-  Gaz.  13: 132,  1881. 


PHILADELPHIA   &  READING  89 

months  before  the  election,  and  for  the  ultimate  reference  of  all 
disputed  points  to  the  Court.  By  this  time  Mr.  Gowen  had  become 
alarmed  at  the  apparent  strength  of  the  McCalmonts,  and  had 
come  to  realize  that  a  possible  disenfranchisement  of  a  part  of  his 
own  holdings  on  the  ground  of  too  recent  transference  might  lessen 
his  chances  of  retaining  control.  He  recalled,  however,  that  the 
annual  meeting  had  been  postponed  from  January  10  to  March  7, 
and  finally  to  March  14.  This,  it  occurred  to  him,  might  transform 
it  from  a  regular  to  a  special  meeting,  and  might,  according  to  the 
terms  of  the  company's  charter,  make  necessary  the  presence  and 
vote  of  a  majority  of  all  the  shares  outstanding,  instead  of  a  simple 
majority  of  all  the  shares  on  hand.  If  this  should  be  true  a  dis- 
enfranchisement of  his  holdings  would  be  of  less  importance ;  for 
whether  disenfranchised  or  not,  these  would  form  part  of  the  total 
shares  outstanding,  of  which  an  absolute  majority  would  be  re- 
quired. 

On  March  12,  two  days  before  the  appointed  date,  Mr.  Gowen 
issued  a  letter  to  the  shareholders.  "I  hold,"  said  he,  "up  to  the 
present  time,  the  proxies  of  1921  shareholders  of  the  company, 
owning  359,500  shares  of  the  capital  stock,  being  very  considerably 
more  than  a  majority  of  all  the  shares.  ...  Of  the  shares  for 
which  I  hold  proxies,  so  large  a  proportion,  however,  may  possibly 
be  disenfranchised  by  failure  to  register,  that  if  the  legal  meeting 
of  the  stockholders  is  held  on  Monday  next,  and  it  should  sub- 
sequently be  determined  by  the  Court  that  three  months'  prior  reg- 
istry is  essential  to  confer  the  right  of  voting,  it  may  be  possible 
that  the  wishes  of  the  great  majority  of  bona  fide  shareholders  may 
be  overruled  by  a  minority.  ...  I  have  determined  to  abstain  from 
attending  the  meeting,  and  I  earnestly  request  all  shareholders 
who  support  the  present  management  to  absent  themselves  from 
the  meeting  on  Monday,  and  thus  to  give  legal  effect  to  their  wishes 
by  making  it  impossible  for  the  minority  to  secure  the  attendance 
of  a  quorum.  .  .  ." l 

Mr.  Gowen's  friends,  English  and  American,  followed  his  sug- 
gestion; and  at  the  meeting  on  Monday  but  211,095  out  of  687,663 
registered  shares  appeared  to  vote.  The  immediate  result  was 
the  almost  unanimous  election  of  Mr.  Bond,  the  candidate  of  the 

1  Chron.  32:  313,  1881. 


90  RAILROAD  REORGANIZATION 

McCalmonts,  which  was  followed  by  litigation  on  the  part  of  Mr. 
Go  wen,  disputing  the  legality  of  the  election.  By  the  terms  of  the 
decree  under  which  the  election  had  been  held,  the  matter  came 
first  before  the  Court  of  Common  Pleas,  which,  on  April  9,  decided 
that  the  meeting  had  been  a  legal  one,  and  that  the  officers  then  voted 
for  by  the  McCalmonts  had  been  duly  elected.  With  the  above  court 
ranged  against  him,  Mr.  Gowen  took  appeal  to  the  Supreme  Court 
of  the  state,  and  meanwhile  declined  to  surrender  his  position. 
On  April  u  the  new  board  proceeded  to  the  Reading  offices  in 
Philadelphia,  made  formal  demand  for  admittance,  and  were  re- 
fused. On  April  22  President  Bond  issued  formal  notice  of  his 
election.  An  injunction  was  asked  against  Mr.  Gowen,  but  was 
held  back  until  the  Supreme  Court  should  have  taken  action. 
Meanwhile  the  old  board  of  managers  announced  that  if  a  decree 
supporting  the  decision  of  the  Court  of  Common  Pleas  should  be 
rendered  they  would  make  no  further  opposition ;  and  the  transfer 
agents  of  the  company  in  Philadelphia  and  New  York  refused  to 
transfer  any  stock  until  the  dispute  should  have  been  settled.  On 
April  19  an  order  of  the  United  States  Court  interfered  with  Mr. 
Gowen's  exclusive  possession,  and  compelled  him  to  furnish  to 
Messrs.  Frank  S.  Bond,  etc.,  suitable  accommodations  in  the  offices 
of  the  Philadelphia  &  Reading  Railroad  Company,  with  free  access 
to  all  books  and  papers.  In  May  the  Supreme  Court  rendered  its 
decision,  holding  the  meeting  of  March  14  to  have  been  a  regular 
meeting,  and  a  majority  of  all  the  stock  outstanding  not  to  have 
been  required  for  a  quorum.  Gowen  asked  for  a  rehearing,  which 
was  denied,  and  in  June,  nearly  four  months  after  the  election,  he 
grudgingly  acknowledged  Mr.  Bond  and  his  associates  as  the  legally 
elected  president  and  board  of  managers. 

During  all  this  time  the  deferred  income  bond  scheme  had  not 
remained  untouched.  In  April,  1881,  on  application  of  the  McCal- 
monts, the  United  States  Circuit  Court  at  Philadelphia  had  granted 
a  preliminary  injunction  against  it.  "Whatever  power  the  defendant 
has  in  the  premises  can  only  be  found  in  the  general  authority  to 
borrow  money,"  said  Judge  McKennan,  and  went  on  to  state  that  the 
issue  did  not  constitute  a  loan,  because  a  loan  implied  reimburse- 
ment, and  the  income  bonds  were  redeemable  at  no  special  time.1 

1  Chron.  32:445,  1881. 


PHILADELPHIA   6-  READING  91 

Mr.  Go  wen  promptly  proposed  to  make  them  redeemable,  and 
insisted  that  this  made  them  still  more  desirable.  A  week  later  the 
$150,000,000  general  mortgage  was  also  enjoined.1 

Once  out  of  the  presidency  Mr.  Gowen  endeavored  to  induce  the 
McCalmonts  to  accept  his  plan.  If  they  would  adopt  the  deferred 
income  bond  scheme,  he  said  in  an  address  to  shareholders,  he 
would  resign  the  receivership  of  the  road  at  once,  give  bonds  never 
to  stand  for  the  presidency  again,  and  further  cooperate  with  them 
in  selecting  a  new  board  of  directors.  As  an  alternative  he  offered  to 
buy  the  McCalmont  shares  at  $40  each,  and  threatened  to  beat  that 
party  at  the  next  election  if  it  refused.2  In  September  he  assured 
the  stockholders  that  he  could  without  difficulty  put  the  road  upon 
its  feet.  "If  Bond  and  his  colleagues  will  resign  and  reinstate  the 
old  management,"  he  cabled  from  London,  "and  advise  me  by 
cable  of  the  change,  I  can,  before  sailing  on  Saturday,  procure 
sufficient  advances  against  the  proceeds  of  preferred  [deferred?] 
income  bonds  and  new  5  per  cent  consols  to  pay  the  floating  debt, 
receivers'  certificates,  and  all  arrears  of  interest." 3  Finally,  appealing 
to  Mr.  Bond  direct,  Gowen  made  formal  application  that  the  new 
board  should  adopt  his  plan  after  changing  the  form  of  the  pro- 
posed obligations  by  making  them  payable  in  100  or  200  years.4  Bond 
refused.  He  pointed  out  that  the  deferred  income  bondholders 
would  be  in  constant  conflict  with  the  management  in  their  endeavor 
to  secure  dividends  on  their  holdings,  and  would  attempt  to  prevent 
proper  and  necessary  expenditures  upon  the  property  from  current 
net  revenues.  He  declared  that  it  was  questionable  whether  the 
company  had  authority  to  sell  its  unsecured  obligations  below  par, 
and  that  in  any  case  the  process  would  be  enormously  expensive ;  and, 
further,  that  the  language  of  the  obligation  did  not  limit  the  pay- 
ment of  interest  to  the  source  of  net  revenue  only,  but  might  be 
construed  to  compel  the  declaration  of  6  per  cent  on  the  income 
bonds  whenever  6  per  cent  should  be  paid  on  the  common  stock.5 
Failing  in  his  attempts  to  win  over  his  opponents,  Gowen  turned  his 
energies  toward  securing  their  defeat. 

Meanwhile  President  Bond  brought  forward  a  plan  of  his  own. 

1  Chron.  32:469,  1881.  2  R.  R.  Gaz.  13:446,  1881. 

8  Ry.  Age,  6:  528,  1881.  4  Annual  Report,  1881,  p.  52. 

*  Annual  Report,  1881,  pp.  50  ff. 


92  RAILROAD  REORGANIZATION 

He  had  grasped  three  points  of  weakness  in  Gowen's  scheme, 
namely,  — 

(1)  The  issue  of  a  mass  of  worthless  obligations  in  the  deferred 
income  bonds; 

(2)  The  high  level  of  fixed  charges  which  a  $150,000,0x30  5  per  cent 
mortgage  entailed ; 

(3)  The  lack  of  any  security  which  had  a  right  to  interest  only 
when  earned,  and  which  might  be  given  to  the  bondholders  in  return 
for  sacrifices  which  they  would  otherwise  refuse  to  make. 

He  proposed,  therefore,  to  create  a  general  consolidated  mortgage 
to  cover  all  the  property  of  the  Reading  Railroad  and  Coal  &  Iron 
Companies,  together  with  the  interest  of  both  companies  in  all  other 
corporations  and  property,  whether  owned  or  controlled  by  lease  or 
otherwise.  This  mortgage  was  to  be  junior  to  the  consolidated  and 
to  the  improvement  mortgages  only,  but  was  to  contain  a  provision 
by  which,  as  bonds  under  these  senior  mortgages  should  be  retired, 
additional  bonds  might  be  issued  under  the  new  mortgage,  which 
was  eventually  to  become  a  first  lien  upon  all  the  properties  of  both 
companies.1  The  total  was  to  be  $150,000,000,  to  be  divided  into 
two  series :  of  which  series  A,  for  $90,000,000,  was  to  run  for  fifty 
years,  and  was  to  have  a  prior  lien  over  series  B  upon  the  revenues 
for  interest  at  the  rate  of  4 J  per  cent,  with  a  right  to  enforce  foreclos- 
ure in  case  of  a  twelve  months'  default ;  and  series  B  was  to  run  sixty 
years,  and  was  to  carry  interest  at  3  per  cent,  with  a  right  to  enforce 
foreclosure  in  case  of  a  three  years '  default.  In  prosperous  years  se- 
ries B  might  receive  more  than  3  per  cent :  thus  the  mortgage  provided 
that  from  current  net  revenue  applicable  to  dividends  it  should  get 
ij  per  cent  additional  interest  before  any  dividend  should  be  paid 
on  the  stock  of  the  company ;  after  that  3  per  cent  might  be  paid  on 
the  capital  stock,  and  then  ii  per  cent  additional  might  be  paid 
on  series  B ;  it  being  understood  that  the  interest  in  excess  of  3  per 
cent  should  not  be  cumulative,  but  was  to  be  paid  only  from  current 
net  revenues  of  the  company  otherwise  applicable  to  dividends. 
These  two  issues  of  unequal  worth  were  to  be  used  for  different 
purposes.  Series  A  was  to  be  in  part  reserved  to  retire  the  senior 
obligations,  and  in  part  to  be  sold  to  pay  off  the  general  mortgage 
bonds,  the  general  mortgage  scrip,  the  income  bonds,  the  floating 

1  Annual  Report,  1881,  pp.  50  ff.;  see  also  Chron.  33:  177,  1881. 


PHILADELPHIA   &>  READING  93 

debt  of  the  Railroad  and  Coal  &  Iron  Companies  secured  by  col- 
lateral, the  receivers'  obligations,  and  the  mortgages  on  real  estate 
that  could  be  paid  off.  Series  B  was  to  be  exchanged  for  the  junior 
obligations,  such  as  the  debenture  or  convertible  loans,  or  was  to  be 
held  in  reserve  for  subsequent  acquisition  of  the  guaranteed  stock 
or  obligations  of  affiliated  corporations  of  the  Railroad  and  Coal  & 
Iron  Companies. 

What  this  meant  for  the  immediate  future  was  that  all  prior  liens 
were  to  remain  untouched,  while  everything  from  the  general  mort- 
gage down  was  to  be  funded  into  the  new  obligations.  In  some  ways 
this  resembled  the  earlier  scheme  of  Mr.  Go  wen,  since  in  each  case 
there  was  to  be  a  $150,000,000  general  mortgage  in  two  parts,  of 
•which  one  part  was  to  have  priority  over  the  other,  and  in  each  case 
this  grand  mortgage  was  to  be  used  ultimately  to  retire  all  previously 
existing  indebtedness.  An  innovation  was  now  made,  however,  in 
the  difference  introduced  between  the  two  series.  In  Gowen's 
scheme  the  amount  of  each  series  was  to  be  the  same,  and  each  was 
to  fare  alike,  except  for  the  priority  of  series  A ;  in  that  of  President 
Bond,  series  A  was  to  be  half  again  as  large  as  series  B,  and  was 
to  bear  a  higher  rate  of  compulsory  interest;  although,  a  point  of 
extreme  importance,  the  return  upon  series  B  was  to  run  from  a 
minimum  of  3  per  cent  to  a  maximum  of  6  per  cent  whenever  the 
road  should  earn  it.  Thus  President  Bond  gained  two  things:  he 
reduced  the  rate  of  interest  which  his  new  bonds  could  claim  in 
any  year  from  5  per  cent  (as  under  Gowen's  scheme)  to  an  average 
of  something  under  4  per  cent,  which  would  yet,  in  prosperous 
times,  net  them  as  much  as  the  old  bonds  surrendered;  and  as  a 
still  further  concession,  he  gave  to  the  3  per  cent  bonds  a  term  of 
sixty  instead  of  fifty  years,  raising  their  value  to  that  extent.  As 
the  various  existing  issues  of  bonds  had  different  market  values,  he 
thought  it  proper  to  equalize  these  values  in  the  exchange  by  the 
grant  of  a  bonus  in  stock,  for  which  the  capital  stock  of  the  company 
was  to  be  increased  one-third.  Here  were  two  of  Gowen's  problems 
in  a  fair  way  of  solution :  the  reduction  of  fixed  charges  was  accom- 
plished, while  some  incentive  was  given  to  the  junior  bondholders 
to  assent.  Scarcely  less  from  the  point  of  view  of  sound  finance  was 
the  gain  from  the  abandonment  of  the  anomalous  deferred  income 
bond  scheme,  with  its  $34,300,000  of  worthless  speculative  secur- 


94  RAILROAD  REORGANIZATION 

ities.  Instead,  the  floating  debt,  under  President  Bond's  plan,  was 
to  be  cared  for  by  the  sale  of  series  A  bonds,  not  at  one-third  their 
face  value,  but  as  near  par  as  possible ;  by  the  best  of  the  company's 
new  securities,  in  other  words,  and.  not  by  the  worst.  And,  finally, 
the  acquisition  of  the  securities  of  subsidiary  roads  was  provided 
for  rather  ingeniously  by  the  conversion  into  series  B  bonds  of 
$10,527,900  convertible  7  per  cent  bonds,  against  which  had  per- 
force been  reserved  an  equal  amount  of  stock.  Conversion  released 
the  stock,  which  became  a  free  asset  available  for  any  uses  to  which 
the  company  saw  fit  to  apply  it. 

Yet  while  the  advance  which  the  plan  of  President  Bond  marks 
over  that  of  President  Gowen  may  be  recognized,  its  defects  must  also 
be  observed.  It  was,  in  the  first  place,  in  common  with  all  other 
schemes  suggested,  too  mild,  too  little  drastic  in  its  operations. 
The  condition  of  the  Reading  companies  was  desperate  in  the  ex- 
treme. By  President  Bond's  own  figures  the  previous  five  years  had 
shown  a  deficit  of  $11,479,217,  or  an  average  loss  per  annum  of 
$2,295,853.  The  net  earnings  for  1881  by  the  same  computation 
had  been  $8,418,009,  and  the  fixed  charges  $i  1,265,666.*  What  was 
needed  was  a  radical  scaling  down  of  indebtedness,  to  take  effect 
not  in  the  far  distant  future  but  at  once.  President  Gowen,  face  to 
face  with  a  similar  situation,  had  evolved  a  reduction  in  fixed 
charges  from  about  $11,000,000  to  about  $7,000,000,  but  had  ex- 
plained that,  owing  to  the  impossibility  of  retiring  all  of  the  prior 
liens  at  once,  the  actual  figures  would  be  approximately  $7,957,000. 
President  Bond,  less  optimistic,  or  more  honest,  stated  that  the 
ultimate  charge  under  his  plan  would  be  about  $6,000,000;  but 
that  the  immediate  reduction  would  be  to  about  $8,339,000  only, 
scarcely  more  than  $100,000  below  the  net  earnings  of  the  current 
year.  Both  estimates  would  probably  have  been  under  the  mark; 
but  the  relief  which  President  Bond  proposed  was  utterly  in- 
adequate even  on  his  own  showing.  A  margin  of  surplus  earnings 
which  could  be  wiped  out  in  a  single  month  was  no  answer  to  the 
demand  for  a  restoration  of  the  Reading  companies  to  solvency.  In 
regard  to  the  floating  debt,  too,  Bond's  plan  left  something  to  be 
desired,  in  that  it  provided  for  no  assessment,  but  cared  for  the  float- 
ing obligations  by  the  sale  of  bonds.  The  danger  in  relying  upon 

1  Ry.  Age,  6:486,  1881. 


PHILADELPHIA   &  READING  95 

the  sale  of  securities  to  supply  the  cash  requirements  of  a  bankrupt 
road  has  been  mentioned  in  connection  with  Mr.  Gowen's  scheme, 
as  indeed  at  other  times  before.  At  best  it  is  advisable  only  in 
prosperous  times,  and  when  the  bonds  offered  are  of  high  grade ; 
and  though  the  series  A  bonds  might  perhaps  have  been  considered 
high  grade,  the  prosperity  of  1880  was  not  repeated  in  1881,  and 
a  year  of  bankruptcy  and  litigation  had  not  improved  the  Reading's 
credit.  That  the  plan  failed,  however,  was  due  neither  to  its  inade- 
quacy nor  to  its  method  of  dealing  with  the  floating  debt ;  but  rather 
to  the  resolute  and  uncompromising  opposition  of  Mr.  Gowen  and 
his  friends,  and  to  the  determination  of  the  junior  securityholders  to 
stand  out  for  better  terms.  This  twofold  resistance  caused  a  syn- 
dicate of  bankers,  which  had  been  relied  upon  to  place  the  new 
loan,  ultimately  to  reject  it,  and  the  plan  fell  through.1 

To  return  now  to  Mr.  Gowen.  This  gentleman  had  been  strength- 
ening his  following  in  every  possible  way,  and  had  secured  one  ally 
of  particular  importance  in  the  person  of  Mr.  Vanderbilt,  who  in 
October,  1881,  was  reported  to  be  buying  largely  of  the  company's 
stock.  Early  in  November  Mr.  Gowen  and  President  Bond  both 
issued  addresses  to  the  shareholders.  The  former  maintained  that 
although  the  present  management  had  been  in  power  for  over  four 
months  it  had  done  nothing  to  extricate  the  company  from  its  diffi- 
culties, and  promised  that  if  elected  he  would  "retain  the  office  long 
enough  to  place  the  company  in  a  good  financial  condition,  by  com- 
pleting the  issue  of  deferred  income  bonds  and  by  issuing  and  sell- 
ing the  5  per  cent  consolidated  mortgage  bonds,  the  result  of  which 
will  be  the  resumption  of  dividends  upon  the  company's  shares."  2 
The  business  prospects  of  the  company  were  never  better,  he  con- 
tinued, and  the  wisdom  of  the  purchase  of  the  great  anthracite  coal 
estate  was  being  demonstrated.  Bond,  on  the  other  hand,  alluded 
to  the  failure  of  Mr.  Gowen's  many  promises,  to  the  wasteful  ex- 
penditure of  money,  to  the  coal  speculations  in  which  the  road  had 
been  engaged,  to  the  payment  of  unearned  dividends,  and  to  other 
points  of  Gowen's  policy,  actual  or  alleged ; 3  and  his  statements 
were  repeated  by  the  McCalmonts  hi  spite  of  Mr.  Gowen's  vehement 
denials.4 

1  Chron.  33:  256,  1881.  2  Ry.  Age,  6:  628,  1881. 

J  R.  R.  Gaz.  13:  624,  1881.  4  R.  R.  Gaz.  13:  672,  1881. 


96  RAILROAD  REORGANIZATION 

The  election  was  held  from  January  9  to  January  14,  1882. 
There  were  cast  493,601  votes,  of  which  Go  wen  received  270,984  and 
Bond  222,617;  a  result  mainly  due  to  the  72,000  Vanderbilt  shares 
voted  for  Mr.  Go  wen.  The  same  meeting  approved  by  resolution 
Gowen's  financial  plans,  and  called  on  the  incoming  board  of  man- 
agers to  carry  them  into  effect.  To  clear  the  way  a  test  suit  was 
brought  in  the  Supreme  Court  of  the  state  of  Pennsylvania,  and  a 
close  decision  obtained  favoring  the  issue.1  Counsel  for  the  McCal- 
mont  Bros,  petitioned  in  the  Circuit  Court  for  leave  to  withdraw 
their  complaint,  stating  that  the  McCalmonts  had  disposed  of  al- 
most all  their  holdings,  and  the  Circuit  Court  vacated  the  injunction 
which  it  had  previously  granted.2 

Gowen's  plan  was  now  triumphantly  brought  forward,  with  the 
few  alterations  which  time  had  suggested.  There  was  to  be  as 
before  a  deferred  income  bond  issue  of  $34,300,000,  which  was  to 
retire  the  floating  debt ;  the  general  mortgage  was  to  be  increased  in 
amount  from  $150,000,000  to  $160,000,000,  but  was  still  to  be 
divided  into  two  series,  equal  in  amount,  and  differing  in  privileges 
only  on  the  point  of  priority  of  lien ;  of  which  series  A  was  ultimately 
to  exchange  for  the  senior,  series  B  for  the  junior  obligations  of 
the  company.  $13,500,000  of  the  first  series  and  $10,000,000  of  the 
second  series  were  to  be  put  out  at  once,  and  $4,000,000  convertible 
adjustment  scrip  were  to  be  issued  to  settle  back  coupons.  Time  had 
apparently  made  more  modest  Mr.  Gowen's  estimate  of  the  saving 
to  be  secured ;  for  instead  of  not  more  than  $7,000,000  as  before,  he 
now  hoped  for  fixed  charges  of  not  more  than  $8,000,000 ;  but  with 
undaunted  optimism  he  made  up  for  this  admission  by  glowing 
pictures  of  what  the  company  in  the  future  was  going  to  earn. 
"Net  earnings  last  year"  (1881),  said  he,  "were  over  $10,000,000  — 
in  1882  they  may  be  expected  to  reach  $11,000,000,  and  they  will 
before  long  be  over  $12,000,000.  With  net  earnings  of  $12,000,000, 
and  fixed  charges  of  $8,000,000,  there  will  remain  a  dividend  fund 
of  $4,000,000,  equal  to  6  per  cent  on  the  share  capital,  and  6  per  cent 
upon  the  par,  or  20  per  cent  upon  the  issue  price,  of  the  deferred 
income  bonds.  "In  order  to  get  the  property  out  of  the  hands  of  the 
receivers  an  earnest  effort  was  made  to  sell  the  $13,500,000  series  A 

1  Chron.  34:  265,  1882;  R.  R.  Gaz.  26:  156,  1882. 

2  Chron.  34:409,  1882. 


PHILADELPHIA    £•  READING  97 

bonds  of  which  mention  has  been  made,  but  at  the  minimum  price 
of  98  subscriptions  for  but  $723,500  were  received,  and  the  company 
was  obliged  to  have  recourse  to  the  $5,000,000  unissued  general 
mortgage  7  per  cent  bonds,  which  it  fortunately  had  at  its  disposal. 
Even  before  this  the  management  had  been  forced  to  abandon  any 
immediate  attempt  to  retire  the  old  general  mortgage  bonds,1  and 
had  been  compelled  to  answer  inquiries  as  to  the  reasons  for  a  de- 
cline in  the  price  of  the  deferred  income  bonds.  On  February  28 
the  receivers  of  the  Railroad  and  Coal  &  Iron  Companies  formally 
surrendered  the  control  of  the  property  to  the  officers  of  those 
corporations. 

One  of  the  first  acts  of  the  reconstructed  company  was  the  lease 
for  999  years  of  the  Central  Railroad  of  New  Jersey.  This  road 
in  many  ways  formed  a  natural  complement  to  the  Reading  system. 
Like  it,  it  was  a  coal  road,  carrying  something  less  than  half  as  great 
a  tonnage  as  the  Reading  itself,  and  owning  extensive  coal  lands  in 
the  Wyoming  region ;  while  in  location  it  supplied  the  necessary 
connection  between  the  Reading  lines  and  New  York.  At  a  later 
date  Mr.  Joseph  S.  Harris  testified  that  all  the  business  of  the  Read- 
ing coming  from  the  South  or  Southwest  went  to  New  York  over  the 
Central ;  while,  on  the  other  hand,  business  from  the  Northwest  was 
carried  by  the  Jersey  Central  from  Scranton,  where  its  lines  began, 
to  Bethlehem,  and  was  there  handed  to  the  Reading  for  transporta- 
tion to  Philadelphia.2  The  advantages  of  the  Central  to  the  Reading 
were  thus  enumerated  by  General  Traffic  Manager  Bell  in  1885 : 
"The  joint  traffic  with  the  Central  Railroad,  outside  of  coal,  and 
outside  of  passengers,  adds  $1,500,000  to  the  revenue  of  the  old 
Reading  system.  By  means  of  the  Lehigh  &  Susquehanna  division 
of  the  Central  Road  we  extend  from  Phillipsburg  to  Scranton  or 
Green  Ridge  through  the  entire  Lehigh  Valley;  that  system  feeds 
our  North  Pennsylvania  line ;  it  is  our  connection  for  the  Catawissa 
system  by  way  of  Tamanend  and  Tamaqua ;  it  is  the  connecting  link 
in  the  cross  line  or  Allentown  system ;  it  creates  the  shortest  line  from 
interior  Pennsylvania,  and  from  Northwest  Pennsylvania  to  New 
York  waters.  Through  the  operations  of  the  lease  we  reach  the  larg- 
est slate  territory  in  Pennsylvania,  and  the  largest  iron  producing 
furnaces  anywhere  in  this  country,  with  the  exception  of  Pitts- 

1  R.  R.  Gaz.  14:  354,  1882.  2  Industrial  Commission,  vol.  9,  p.  607. 


98  RAILROAD  REORGANIZATION 

burg."  J  In  1883  the  Central  was  bankrupt  with  no  immediate 
prospect  of  recovering  from  its  difficulties,  and  had  therefore  an 
incentive  to  accept  any  arrangement  by  which  interest  on  its  obliga- 
tions should  be  paid ;  while  Mr.  Gowen,  with  misplaced  confidence 
in  his  scheme  of  reorganization,  was  ready  to  put  fresh  burdens  on 
his  road  in  the  hope  of  future  gain. 

Rumors  of  a  lease  were  abroad  in  1882,  and  after  the  termination 
of  the  Reading  receivership  the  operation  was  pushed  to  a  speedy 
conclusion.  The  Reading  undertook  to  assume  all  the  obligations 
of  the  Central,  and  to  pay  6  per  cent  on  its  capital  stock  then  out- 
standing, as  well  as  $18,000  annually  for  maintaining  the  corporate 
organization  of  the  lessor.  In  case  any  of  the  Central  bonds  should 
be  retired,  or  rentals  or  interest  reduced,  the  rental  to  be  paid  by  the 
Reading  was  likewise  to  be  reduced.  The  roadbed  and  rolling  stock 
of  the  Central  was  to  be  maintained  undiminished,  but  if  the  Read- 
ing should  make  any  additions  or  improvements,  or  if  from  its  own 
funds  it  should  pay  off  any  of  the  Central's  obligations,  it  was  to  re- 
ceive equivalent  bonds  with  interest  not  exceeding  6  per  cent  from 
the  Central  Company.  The  lease  was  terminable  on  60  days'  notice 
in  case  the  lessee  should  fail  at  any  time  to  carry  out  its  provisions.2 
This  involved  something  more  than  a  nominal  obligation.  The  net 
earnings  of  the  Jersey  Central  in  1882  had  been  $5,091,072,  while 
the  sum  due  for  rentals,  interest,  6  per  cent  dividends,  etc.,  had 
mounted  up  to  $5,898,087,  not  including  payments  on  car  trusts  or 
certain  contingent  obligations.  Broadly  speaking,  the  Reading  pro- 
posed to  guarantee  6  per  cent  on  the  stock  of  a  road  which  had  failed 
because  unable  to  meet  its  fixed  charges;  and  however  great  the 
ultimate  advantages,  it  is  apparent  that  the  prospect  of  a  drain  upon 
the  Reading  Company  was  real.  In  order  to  get  the  road  out  of 
receivers'  hands,  the  Reading  had  further  to  take  care  of  a  floating 
debt  of  $2,062,000,  and  to  compromise  with  certain  creditors  by 
settling  back  interest  on  their  bonds.  This  was  done,  and  on  May  29, 
1883,  possession  formally  passed  over.  The  same  day  was  con- 
cluded another  arrangement,  whereby  the  Central  of  New  Jersey 
leased  the  coal  and  railroad  companies  comprised  in  the  Lehigh 
Coal  &  Navigation  Company  for  one-third  of  their  gross  receipts, 
and  the  Philadelphia  &  Reading  Railroad  became  liable  for  the 

1  Ry.  Age,  10:  218,  1885.  2  Annual  Report,  1883,  pp.  in  ff. 


PHILADELPHIA   &  READING  99 

faithful  execution  of  the  contract.  The  Reading  agreed  that  the 
Lehigh  coal  lands  should  be  developed  pari  passu  with  its  own,  so 
that  the  product  of  the  two  estates  should  be  constantly  as  28  to  72 
until  the  Lehigh  production  should  reach  3,000,000  tons.  The 
rental  of  the  road  was  not  in  any  year  to  be  less  than  $1,414,400, 
nor  more  than  a  sum  rising  from  $1,728,700  before  1887  to  $1,885,800 
from  1887  to  1892,  and  $2,043,000  after  1892,  plus  certain  minor 
payments ;  and  there  was  provision  for  arbitration  of  any  disputes 
which  might  arise.1 

The  year  1883  now  seemed  to  find  the  Reading  imbued  with  new 
life.  Earnings  increased,  both  gross  and  net,  fixed  charges  as  re- 
ported rose  less  rapidly,  and  the  net  profits  for  the  year,  or  balance 
on  all  operations,  showed  a  threefold  increase.  "The  company," 
said  Mr.  Gowen,  "has  now  surmounted  the  difficulties  of  the  last 
four  eventful  years." 2  The  annual  meeting  hi  January  was  a  genuine 
love-feast,  marked  by  the  presentation  of  resolutions  highly  flattering 
to  Mr.  Gowen.  "We  trust,"  said  one,  "we  thankfully  appreciate 
your  herculean  efforts  in  our  behalf,  in  the  face  of  unparalleled 
difficulties  and  obstacles,  in  rescuing  our  property  from  bankruptcy 
against  the  malignant  and  determined  efforts  of  its  enemies  and 
conspirators  to  foreclose  and  wreck  it."  "As  citizens  of  this  great 
commonwealth,"  said  another,  "we  beg  to  add  our  gratitude  and 
admiration  for  your  untiring,  brave,  honest,  and  able  devotion, 
which  has  preserved  the  Philadelphia  &  Reading  Company  intact, 
and  has  fairly  started  it  on  a  broader  career  of  usefulness."  3  Not 
less  extraordinary  was  the  further  action  of  this  harmonious  meeting. 
In  the  first  place,  it  authorized  the  creation  of  a  collateral  trust 
loan  of  $12,000,000  for  the  purpose  of  paying  the  floating  debt,  the 
balance  due  upon  the  purchase  of  Central  Railroad  Company  of 
New  Jersey  stock,  and  the  retirement  of  the  outstanding  income 
mortgage  bonds.  What,  may  be  inquired,  had  become  of  the  deferred 
income  bonds  of  which  Mr.  Gowen  had  been  so  proud,  and  the 
$5,000,000  additional  first  series  consols  which  with  them  were 
to  cover  the  floating  debt,  if  a  new  collateral  loan  was  needed 
for  the  purpose  for  which  they  had  been  considered  ample  ?  As  for 
the  purchase  of  Jersey  Central  shares,  an  account  would  require 

1  Annual  Report,  1883,  pp.  139  ff.  l  Chron.  37:  563,  1883. 

8  Annual  Report,  1883,  pp.  25-7. 


100  RAILROAD  REORGANIZATION 

a  chapter  in  itself.  The  intent  had  been  to  secure  more  complete 
control  of  this  subsidiary  road.  The  purchase  had  been  made  on 
margin  in  May.  By  January,  1884,  more  funds  were  necessary 
to  carry  the  stock ;  and  as  the  business  depression  grew  acute,  the 
Reading  was  obligee}  to  seek  a  time  loan  from  Mr.  Vanderbilt,  and 
to  pledge  the  purchased  securities  as  collateral  therefor.  When  the 
loan  matured  Reading  was  no  better  off  than  it  had  been  before,  and 
Vanderbilt,  who  seldom  mixed  philanthropy  with  business,  sold  the 
stock.  The  original  purchase  had  been  at  78;  the  prices  obtained 
when  the  stock  was  thrown  on  the  market  ranged  from  57  to  50, 
and  the  Reading  lost  the  difference,  besides  those  advantages  which 
it  had  expected  to  gain. 

In  the  second  place,  the  meeting  proposed  a  dividend  of  21  per 
cent  on  the  preferred  stock,  representing  arrears  due,  and  of  3  per 
cent  on  the  common ;  both  cash,  and  to  be  paid  in  case  the  collateral 
loan  should  succeed.1  In  order  to  give  shareholders  time  to  consider, 
an  adjournment  was  taken  for  two  weeks,  after  which  the  dividend 
on  the  preferred  stock  was  approved,  though  that  on  the  common 
was  not.  It  seems  almost  superfluous  to  insist  upon  the  folly  of 
this  dividend.  The  Reading  had  not,  in  reality,  "  surmounted  the 
difficulties  of  the  last  four  eventful  years."  Scarcely  any  of  the 
benefits  promised  by  Mr.  Gowen's  plan  of  reorganization  had  been 
secured ;  fixed  charges  had  not  been  reduced,  because  it  had  been 
found  impossible  to  get  creditors  to  take  new  securities  in  exchange 
for  the  old,  and  equally  impossible  to  sell  any  considerable  amount 
of  the  new  securities  for  cash.  While  old  charges  had  remained  un- 
abated, new  charges  had  been  added  through  the  lease  of  the  Jersey 
Central,  new  car  trusts,  and  the  like,  and  the  very  gain  in  earnings 
which  might  have  been  construed  as  favorable  was  due  to  increased 
mileage,  and  was  not  proportional  to  the  growth  of  the  system.2  A 
fitting  sequel  to  Mr.  Gowen's  words  and  acts  was  the  scrip  payment 
for  labor  and  supplies  which  took  place  in  May,  1884,  and  the 
accompanying  fall  in  the  prices  of  the  company's  securities.  On 
June  2  the  company  again  passed  into  receivers'  hands.  The  same 
judges  were  applied  to  as  in  1880,  and  the  same  receivers  were  ap- 

1  Annual  Report,  1883.  The  proposition  was  made  by  Mr.  Gowen. 

2  From  November  30,   1883,  to  January  2,   1884,  reliable  figures  subsequently 
showed  a  deficit  of  $2,000,000. 


PHILADELPHIA   cr8  READING  IOI 

pointed,  except  that  Mr.  Gowen,  who  had  given  up  the  presidency  of 
the  company,  was  replaced  by  Mr.  George  de  Keim,  his  successor.1 

The  various  creditors  had  now  to  do  what  should  have  been  done 
before,  and,  by  lightening  the  charges  upon  the  road,  to  put  it 
in  a  position  where  its  solvency  could  be  maintained.  The  chances 
for  obtaining  radical  action  from  the  bondholders  were  somewhat 
brighter,  since  even  the  most  obstinate  were  being  forced  to  realize 
that  no  halfway  measures  would  avail;  and  a  reasonable  solution 
was  even  thus  early  hinted  at  in  the  suggestion  that  some  of  the 
bonds  under  which  the  road  was  staggering  should  be  replaced  by 
stock.  Nevertheless,  we  shall  find  in  this  reorganization  a  slow 
working  out  of  the  requirements  for  a  plan,  and  a  slow  process  of  at 
least  partial  reconcilement  to  the  inevitable. 

The  receivers'  report  was  issued  in  October,  but  contained  little 
not  known  or  suspected  before.  From  November  30,  1883,  to 
June  2,  1884,  there  had  been  a  net  loss  in  operation  for  the  Railroad 
Company  of  $2,322,282,  and  for  the  Coal  &  Iron  Company  of 
$1,049,702,  showing  conclusively  the  condition  of  the  companies. 
The  total  bonded  indebtedness  was  $94,613,042 ;  a  total  to  be  com- 
pared with  the  $78,101,894  of  four  years  previous.  The  total  floating 
debt  was  $16,549,968  as  compared  with  $10,254,766  at  the  begin- 
ning of  the  previous  receivership.  Including  the  Central  of  New 
Jersey,  the  total  fixed  charges  for  the  Railroad  and  Coal  &  Iron 
Companies  were  $18,241,051 ;  a  sum  which  certain  offsets,  however, 
reduced  to  $16,584,732. 2 

The  first  suggestion  for  a  reorganization  came  from  a  committee 
primarily  representing  the  general  mortgage  bondholders,  though 
including  other  interests  as  well.  The  chairman  was  Mr.  Townsend 
Whelen,  and  the  committee  may  be  taken  to  represent  the  views 
of  the  management.  "The  present  fixed  charges  of  the  company," 
said  Mr.  Whelen,  "are  in  round  numbers  $16,650,000,  while  the 
earnings  of  the  past  fiscal  year  are,  in  round  numbers  and  after 
proper  deductions,  $12,900,000.  The  objects  sought  to  be  accom- 
plished by  the  committee  are: 

"(i)  To  reduce  fixed  charges  to  the  limit  of  last  year's  earnings; 

"  (2)  To  preserve  the  proper  order  of  priorities  of  each  class  of 
securities,  so  that  no  income  applicable  to  any  senior  security  that 

1  Chron.  38:  679,  1884.  *  Ibid.  39:461,  1884. 


102  RAILROAD  REORGANIZATION 

remains  unpaid  can  by  any  possibility  be  diverted  to  paying  the 
interest  on  a  junior  security ; 

"(3)  To  provide  a  method  of  paying  the  floating  debt." 
The  plan  was,  roughly,  to  leave  the  prior  liens  untouched,  to  fund 
one-half  the  coupons  upon  the  general  mortgage  for  three  years,  and 
to  convert  all  of  the  other  obligations  into  income  bonds.  Preferred 
stock  was  to  be  changed  from  cumulative  to  non-cumulative ;  rents 
of  leased  lines,  including  the  Central  of  New  Jersey,  were  to  be 
reduced  to  the  amounts  which  the  properties  had  earned ;  the  canal 
leases  were  to  be  reduced ;  the  interest  on  some  of  the  divisional  coal 
land  mortgages  was  to  be  reduced,  and  on  some  was  to  be  paid  in 
full.  In  regard  to  the  floating  debt  the  committee  decided  to  post- 
pone any  attempt  to  raise  money  for  its  extinction.  If  the  bond- 
holders should  accept  the  scaling  down  of  their  indebtedness,  the 
company  might  have  no  difficulty  in  procuring  cash  by  a  collateral 
loan ;  if  this  should  prove  impossible,  the  duty  of  providing  funds 
would  devolve  upon  the  junior  securities.1  The  committee  found  it 
impossible  to  prepare  within  the  short  time  at  their  disposal  a  com- 
plete plan  of  reorganization  with  exact  figures  of  present  and  pro- 
posed fixed  charges ;  and  it  is  therefore  impossible  to  ascertain  how 
great  was  the  saving  which  they  expected  to  secure. 

The  plan  marks  sufficiently  well  the  advance  which  had  been 
made  since  the  reorganization  of  1880-3.  The  best  that  could  then 
be  imagined  had  been  the  creation  of  a  grand  general  mortgage  for 
which  the  old  bondholders  might,  but  mostly  did  not,  exchange  their 
holdings;  while  now  the  very  first  suggestion  endeavored  to  retain 
for  all  bondholders  a  chance  for  the  same  return  as  before,  and 
found  the  salvation  of  the  company  in  the  transformance  of  certain 
bonds  from  mortgage  to  debenture  obligations.  The  general  criti- 
cisms which  may  be  made  are  three:  first,  that  it  was  unwise  to 
defer  all  provision  for  the  floating  debt ;  second,  that  the  new  income 
bonds  might  better  have  been  replaced  by  stock ;  and  third,  that  the 
probable  reduction  in  fixed  charges  would  have  been  insufficient. 
So  far  as  the  committee  suggested  any  action  in  relation  to  the  float- 
ing debt,  it  favored  a  funding  of  it.  This  funding  might  have  been 
either  into  mortgage  or  into  income  bonds :  if  the  former,  the  fixed 
charges  of  the  company  would  have  been  increased,  or  else  the  other 

1  Annual  Report,  1884,  pp.  21-8. 


PHILADELPHIA   &  READING  103 

mortgage  bondholders  would  have  been  compelled  to  accept  a  lower 
rate  of  interest ;  if  the  latter,  the  volume  of  securities  of  slight  value 
would  have  been  increased,  or  the  junior  securities  would  have  had 
to  take  less  for  their  holdings.  The  action  taken  would  have  gone  far 
to  determine  what  classes  of  securities  would  assent,  while  in  the 
absence  of  definite  declaration  it  was  on  the  whole  likely  that  all 
classes  would  hold  off.  As  for  the  income  bonds,  it  is  in  general  true 
that  they  are  an  unsatisfactory  sort  of  security,  and  likely  to  hinder 
the  legitimate  increase  of  capital.  Most  important  was  the  question 
of  fixed  charges.  It  will  be  remembered  that  of  the  first  and  second 
series  55  of  the  previous  reorganization  only  $23,500,000  had  been 
intended  for  immediate  sale,  and  that  of  these  but  a  portion  had  been 
disposed  of ;  and  yet  these  consols  were  the  only  securities  the  nature 
of  which  was  really  changed  by  the  Whelen  plan.  Interest  had  been 
optional  before  on  the  income  bonds,  the  convertible  bonds,  the  con- 
vertible adjustment  scrip,  debenture  and  deferred  income  bonds; 
interest  was  not  made  optional  on  the  general  mortgage  or  prior 
liens.  The  result  would  not  have  been,  in  spite  of  the  reduction  in 
rents  and  the  scaling  of  the  divisional  coal  mortgages,  any  sufficient 
lessening  of  the  fixed  requirements.  This  fact  was,  moreover,  per- 
ceived. The  board  of  managers,  to  whom  the  scheme  was  reported, 
concluded  a  favorable  opinion  with  the  declaration,  "to  conclude, 
we  are  satisfied  that  the  large  economies  already  in  operation,  with 
those  which  are  still  being  introduced,  should  be  regarded  as  a  mar- 
gin to  meet  adverse  contingencies.  .  .  .  That  the  revenue  we  reckon 
on,  though  reasonably  certain  under  such  reorganization,  will  surely 
not  be  realized  in  case  the  property  should  be  torn  asunder  by  fore- 
closure sale."  *  In  other  words  they  relied,  much  as  Mr.  Go  wen 
had  done  two  years  before,  on  a  subsequent  increase  in  earnings 
to  ensure  the  solvency  of  the  company.  A  final  objection  made  at 
the  time  was  that  the  plan  asked  too  little  of  the  junior  securities. 
The  Whelen  plan  was  reported  to  the  general  managers'  com- 
mittee, and  was  approved  by  them.  Some  slight  modifications  were 
made,  and  a  large  number  of  signatures  was  secured.  Opposition 
was  not  slow  to  spring  up.  In  February  a  meeting  of  general  mort- 
gage bondholders  elected  a  committee,  known  as  the  Bartol  Com- 
mittee, to  prepare  a  plan  more  suited  to  their  interests.  This  body 

1  R.  R.  Gaz.  17:80,  1885. 


104  RAILROAD  REORGANIZATION 

conferred  with  the  Whelen  Committee,  and  two  members  from  each 
were  selected  to  construct  a  new  reorganization  plan.1  In  March 
it  reported  to  its  constituents  that  it  had  made  all  the  concessions 
which  were  possible  without  sacrificing  the  interests  of  the  general 
mortgage  bondholders,  and  that  in  spite  of  this,  the  negotiations 
had  not  proved  successful.2 

In  April,  ten  months  after  the  beginning  of  the  receivership,  the 
Reading  managers  evolved  a  plan  for  dealing  with  the  floating  debt. 
Holders  were  to  agree  to  accept  renewals  at  intervals  of  three  months 
for  three  years,  with  interest  at  the  rate  of  6  per  cent,  paid  at  the 
time  of  each  renewal,  and  to  hold  the  collateral  pledged  as  security 
until  the  whole  of  the  debt  should  have  been  discharged.  In  case  the 
Philadelphia  &  Reading  should  fail  at  any  time  punctually  to  pay 
the  interest  on  any  of  the  obligations  agreed  to  be  renewed,  or  should 
fail  to  cause  the  same  to  be  renewed,  or  in  case  nine-tenths  of  the 
floating-debt  holders  should  not  assent  to  the  plan,  or  in  case  an 
adverse  judicial  sale  should  be  made,  the  obligation  to  accept  further 
renewals  should  immediately  cease.3  The  scheme  deservedly  fell 
through.  Creditors  were  asked  to  tie  up  their  assets. for  three  years, 
with  no  concession  in  return  except  the  payment  of  interest  quarterly 
in  advance;  while  the  unofficial  suggestion  that  the  Reading  pay 
J  per  cent  commission  on  each  renewal  was  felt  to  be  too  expensive 
for  the  company  to  entertain. 

The  following  month  the  Whelen  and  Bartol  committees  came 
out  with  a  new  edition  of  the  Whelen  plan,  which  introduced  an 
assessment  on  the  junior  bonds  and  stock,  but  preserved  the  same 
method  of  dealing  with  the  old  securities  as  before.4  Assent  to  the 
plan  was  to  be  on  the  condition  that  sufficient  money  should  be 
raised  to  pay  off  the  floating  debt.  Interest  on  such  debt  was  not 
to  have  priority  of  payment  over  interest  on  the  general  mortgage 
for  longer  than  three  years ;  and  during  those  three  years  the  prefer- 
ence was  to  be  limited  to  that  part  of  the  floating  debt  secured  by 
collateral  yielding  income  to  cover  interest,  or  important  for  other 
reasons  to  be  retained.  There  were  to  be  seven  reorganization 
trustees  to  receive  the  assents  of  parties  in  interest,  and  to  receive 

1  R.  R.  Gaz.  17:  144,  1885.  *  Ibid.  17:  160,  1885. 

3  Ibid.  17:224,  1885. 

4  Collateral  bonds  were  to  be  given  for  the  assessment. 


PHILADELPHIA   &  READING  105 

and  hold  the  securities  and  assessments  thereon  pending  reorgan- 
ization, and  when  accomplished  to  return  such  securities  duly 
stamped  to  their  respective  owners.1  The  trustees  were  further  to 
decide  whether  the  assents  to  the  plan  in  question  should  be  con- 
sidered adequate,  and  if  they  should  conclude  on  or  before  May  i, 
1886,  by  a  vote  of  six  of  their  number,  that  the  assents  were  not 
sufficient,  they  were  to  call  into  a  council  the  managers  of  the  Phil- 
adelphia &  Reading  Railroad  Company,  the  receivers  of  that  com- 
pany, and  the  committees  of  the  general  mortgage  (Bartol)  and 
income  mortgage  bondholders;  and  this  council,  by  a  vote  of  four 
of  the  five  interests  therein  represented,  was  to  formulate  a  plan  of 
reorganization  adapted  to  the  circumstances,  and  involving  no  larger 
contribution  in  money  to  be  paid  than  under  the  plan  as  then  modi- 
fied; and  under  such  power  the  trustees  were  to  proceed  to  fore- 
close under  such  mortgage  or  mortgages  as  they  might  deem  ad- 
visable.2 The  plan  was  obviously  a  compromise  whereby  the  Whelen 
Committee  clung  to  the  main  lines  of  its  previous  proposition,  and 
the  Bartol  Committee  secured  modifications  which  benefited  the 
general  mortgage  at  the  expense  of  the  junior  securities.  Criticisms 
which  applied  to  the  earlier  plan  largely  apply  to  this  also ;  but  it  is 
to  be  noticed  that  at  last  the  idea  of  funding  the  floating  debt  was 
abandoned  for  the  sounder  scheme  of  paying  it  off  in  cash.  The 
reorganization  trustees  were  an  innovation,  but  were  destined  to  be 
a  useful  one.  On  the  whole  the  compromise  was  a  step  forward ;  and 
yet  it  was  not  more  successful  in  obtaining  assents  than  the  scheme 
which  had  preceded  it.  Although  the  directors  approved  it,  as  was 
to  have  been  expected,  the  bulk  of  the  bondholders  held  off. 

Matters  now  went  on  in  much  the  same  old  way.  The  seven  re- 
organization trustees,  representing  the  principal  interests  concerned, 
held  meeting  after  meeting  with  no  apparent  result.  The  courts 
became  impatient ;  bondholders  clamored  for  their  interest ;  but  after 
the  failure  of  the  earlier  plan  the  way  out  seemed  harder  and  harder 
to  find.  In  September,  1885,  Mr.  E.  Dunbar  Lockwood  addressed 

1  Chron.  40:  569,  1885.    The  trustees  were  to  be  appointed  as  follows:    One  by 
foreign  creditors,  two  by  the  general  mortgage  bondholders,  one  by  the  income 
mortgage  bondholders,  one  by  holders  of  securities  junior  to  the  income  mortgage, 
and  two  by  the  shareholders. 

2  Ry.  Age,  10:314,  1885. 


106  RAILROAD  REORGANIZATION 

an  open  letter  to  Mr.  John  B.  Garrett,  one  of  the  trustees,  in  which 
the  following  points  were  made : 

(1)  "The  trustees  should  recognize  promptly  and  unequivocally 
that  the  Reading  Railroad  is  bankrupt,  and  has  not  sufficient  avail- 
able assets  to  meet  its  obligations. 

(2)  "  Two  dollars  of  obligations  cannot  be  paid  with  one  dollar  and 
a  half  of  assets,  and  the  sooner  all  persons  interested  .  .  .  recognize 
this  fact,  and  agree  to  scale  both  principal  and  interest  sufficient  to 
meet  the  obligations  of  the  company  and  put  it  upon  a  strong  financial 
basis,  with  sufficient  working  capital  to  enable  it  to  conduct  its 
future  business  economically,  the  better  it  will  be  for  all  concerned. 

(3)  "  The  trustees  should  look  only  at  the  facts  as  they  exist  .  .  . 
and  while  endeavoring  to  rehabilitate  the  road,  also  bring  it  into 
harmonious  relations  with  its  adversaries. 

(4)  "  The  trustees  should  consider  the  problem  .  .  .  precisely  as 
business  men  consider  the  matter  of  the  settlement  of  a  bankrupt 
firm.   The  question  at  once  presents  itself,  is  it  best  that  the  com- 
pany should  continue  in  business,  or  should  it  be  wound  up?  "  * 

In  his  reply  Mr.  Garrett  pointed  out  the  difficulties  to  be  over- 
come, and  concluded  by  saying  that  in  his  judgment  no  reorgan- 
ization would  be  final  that  did  not  ensure  the  establishment  of  credit, 
the  entrusting  of  the  management  to  an  interest  having  an  actual 
equity  in  the  property,  and  just  expectation  of  pecuniary  return  from 
it,  and  harmony  with  competing  lines,  coupled  with  due  regard  for 
the  rights  of  the  public.2 

The  reorganization  trustees  by  this  time  appeared  discouraged, 
and  the  following  month  called  a  conference  of  creditors  at  which 
a  resolution  was  passed  looking  toward  foreclosure.  In  November 
a  suit  was  actually  begun,  supplementary  to  a  similar  suit  instituted 
a  year  before.  It  was  during  the  pendency  of  these  proceedings  that 
the  plan  of  reorganization  devised  by  the  reorganization  trustees 
themselves  came  out,  and  marked  a  third  effort  to  rehabilitate  the 
road.  The  first  plan  proposed,  it  will  be  remembered,  had  sug- 
gested the  conversion  of  all  of  the  junior  securities  into  income 
bonds,  plus  a  funding  of  one-half  the  general  mortgage  coupons  for 
three  years;  and  the  second  had  introduced  an  assessment  on  the 
junior  bonds  and  stock.  This  third  plan,  while  preserving  the 

1  R.  R.  Gaz.  17:  607,  1885.  2  Chron.  41:  307,  1885. 


PHILADELPHIA   er=  READING  107 

assessment,  and  making  it  more  severe,  added  a  provision  for  the 
conversion  of  general  mortgage  liens  into  3  per  cent  bonds,  and 
of  junior  liens  into  preferred  stock.  For  the  ultimate  retirement  of 
the  prior  liens  a  new  fifty-year  5  per  cent  mortgage  was  to  be 
created ;  for  both  the  prior  and  general  mortgage  liens  the  difference 
between  the  return  from  the  old  bonds  and  that  from  the  new  was 
to  be  adjusted  by  the  use  of  5  per  cent  preferred  stock,  so  that 
bondholders  in  prosperous  times  would  not  find  their  incomes  dimin- 
ished. Preferred  stock  was  to  be  of  two  kinds,  of  which  the  first  was 
to  go  to  satisfy  the  general  mortgage  bondholders  and  for  assess- 
ments, while  the  second  was  to  exchange  at  varying  rates  for  the 
junior  securities  above  the  second  series  53.  Everything  below 
the  second  series  55  was  to  receive  common  stock  instead.  Under  the 
scheme  the  company's  obligations  would  have  been  reduced  to 
$60,731,000,  of  which  $33,400,000  prior  liens  and  $24,686,000  new 
3  per  cents ;  while  its  stock  would  have  been  increased  to  the  very 
considerable  figure  of  $96,516,282.  The  total  cash  assessments,  if 
all  paid,  would  have  amounted  to  $13,506,620;  and,  joined  with 
the  balance  of  stock,  were  expected  to  be  sufficient  to  cover  the 
floating  debt.  The  new  fixed  charges  were  to  be  $7,o64,83o.1 

Various  points  in  the  plan  deserve  mention.  For  the  first  time 
since  the  failure  of  1880  it  was  proposed  to  use  two  kinds  of  secur- 
ities, of  which  interest  on  one  should  be  fixed,  and  interest  on  the 
other  optional.  For  the  retirement  of  senior  bonds  President  Bond 
had  suggested  a  bond  on  which  half  the  interest  should  be  fixed  and 
the  other  half  variable,  but  his  plan  had  been  inferior  in  flexibility 
to  the  one  now  proposed.  The  junior  securities  received  less  favor- 
able treatment  than  before ;  but  the  general  mortgage  itself  did  not 
escape,  and  was  required  to  accept  3  per  cent  plus  preferred  stock 
instead  of  a  mere  funding  of  its  coupons.  The  increase  in  the  amount 
of  stock  was  very  great,  and  naturally  so,  in  view  of  the  new  uses 
to  which  it  was  put.2  Assessments  were  made  heavier,  and  for  the 
first  time  the  management  frankly  excluded  from  their  calculations 
the  Central  of  New  Jersey,  foreshadowing  the  abandonment  of  the 
lease.  To  repeat,  the  first  two  plans  described  had  developed  the 
idea  of  an  assessment  and  the  conversion  of  the  junior  bonds  into 

1  Chron.  41 :  654,  1885. 

3  Preferred  from  $846,950  to  $36,381,820;  common  from  $36,822,975  to  $60,134,462. 


I08  RAILROAD  REORGANIZATION 

income  obligations.  To  this  the  reorganization  trustees  added  the 
use  of  preferred  stock,  and,  more  important  still,  the  combination 
of  two  securities,  respectively  with  obligatory  and  optional  liens, 
which  were  to  be  given  for  the  general  mortgage  bonds.  In  prin- 
ciple the  result  was  excellent,  in  practice  the  degree  of  reduction  was 
somewhat  too  slight  from  the  point  of  view  of  the  company,  al- 
though it  seemed  more  than  the  creditors  were  willing  to  accept. 
The  general  mortgage  bondholders  in  particular  were  loud  in  their 
protest.  "The  truth  of  the  matter  is  this,"  said  one  of  them,  " while 
the  plan  of  the  trustees  has  much  to  commend  it,  and  is  based  on 
an  excellent  theory,  it  fails  to  cover  the  whole  ground,  and  falls 
terribly  short  of  meeting  our  reasonable  demands."  Thus,  although 
the  Bartol  and  Whelen  committees  accepted  the  plan,  matters  again 
stood  still  for  a  while,  while  the  financial  powers  talked  and  wrote 
and  threshed  the  question  out. 

In  February,  1886,  the  reorganization  trustees  received  a  letter 
signed  by  J.  Pierpont  Morgan  and  John  Lowber  Welsh,  which  is 
important  enough  to  be  quoted  in  full. 

"A  syndicate  has  been  formed,"  said  these  gentlemen,  "com- 
posed of  leading  bankers  and  capitalists  here  and  in  Europe,  to- 
gether with  corporations  or  their  representatives  controlling  large 
transportation  and  coal  producing  interests,  who  have  agreed  to 
subscribe  in  the  aggregate  $i  5, 000,000  for  the  purpose  of  aiding  in 
the  reorganization  of  the  Philadelphia  &  Reading  Railroad  Com- 
pany and  its  affiliated  lines.  The  syndicate  has  no  commitment  of 
any  kind  with  any  other  railroads  or  corporations  upon  this  subject 
beyond  securing  a  management  in  harmony  with  the  principle  that 
capital  invested  in  internal  improvements  should  be  so  managed 
as  to  result  in  a  fair  return  in  the  way  of  interest  and  dividends. 
Their  object  and  purpose  is  to  secure  the  reorganization  on  business 
principles  for  the  Philadelphia  &  Reading  bondholders,  stockholders, 
and  creditors  without  prejudice  to  the  relative  position  of  either, 
and  in  their  interest  only. 

"To  do  this  effectually  there  must  be  suitable  arrangements  made 
with  the  Pennsylvania  Railroad  and  other  kindred  coal  interests  for 
harmonious  relations,  in  order  that  suitable  prices  may  be  obtained 
for  coal  produced  and  shipped.  These  objects  we  shall  endeavor 
to  secure,  and  we  now  enclose  you  a  copy  of  a  correspondence 


PHILADELPHIA   &  READING  109 

with  Mr.  Roberts,  president  of  the  Pennsylvania  Railroad,  on  these 
subjects,  which  seems  to  us  sufficient  to  warrant  the  syndicate  in 
placing  reliance  upon  the  assurance  given  by  that  company. 

"  As  the  reorganization  shall  proceed  our  effort  and  expectation 
will  be  to  bring  about  satisfactory  arrangements  with  all  the  anthra- 
cite coal  roads,  and  also  the  trunk  lines,  which  shall  secure  to  the 
Philadelphia  &  Reading  Railroad  Company,  when  reorganized,  its 
just  share  of  the  business  at  remunerative  rates. 

"The  syndicate  have  believed  that  your  plan  was,  in  the  main, 
suitable  for  the  purpose  of  reorganization,  and  that  your  board 
was  composed  of  gentlemen  who  would  command  the  confidence  of 
all  parties  in  interest. 

"They  therefore  prefer  to  make  an  arrangement  with  you  and 
to  aid  you  in  working  out  a  plan. 

"But  they  also  think  that  there  should  be  certain  modifications 
as  to  your  organization,  and  also  as  to  your  plan,  as  follows : 

"(i)  The  syndicate  would  wish  two  persons,  to  be  named  by 
them,  added  to  your  board. 

"  (2)  Your  plan  should  be  made  so  flexible  that  it  could  be  modified 
hereafter  in  such  respects  as  may  be  found  necessary  to  success. 

"(3)  There  should  be  an  executive  committee  of  five  to  take 
charge  of  the  foreclosure  proceedings,  the  purchase  of  the  property, 
the  organization  of  the  new  company,  and  generally  of  whatever 
may  properly  appertain  to  reconstruction  under  the  plan.  There 
should  be  five  voting  trustees  who  should  vote  on  the  stock  when 
deposited  under  the  plan,  and  to  whom  the  power  of  voting  on  the 
stock  hi  the  reorganized  company  should  be  confided  for  five  years 
after  reorganization.  These  two  committees  should  be  composed 
of  parties  satisfactory  to  the  syndicate  and  the  trustees,  and  shall 
fill  their  own  vacancies.  But  in  case  the  syndicate  and  trustees 
cannot  agree  upon  the  five,  then,  and  in  that  case,  three  shall  be 
named  by  the  syndicate  and  two  by  the  trustees,  and  each  class 
shall  fill  any  vacancy  occurring  in  its  own  number. 

"(4)  The  compensation  to  be  allowed  to  the  syndicate  shall  be 
5  per  cent  on  the  amount  of  the  syndicate  capital. 

"  (5)  The  syndicate  to  be  allowed  interest  at  the  rate  of  6  per  cent 
upon  any  amount  they  may  advance  the  company  in  the  course  of 
the  process  of  foreclosure  and  reorganization. 


110  RAILROAD  REORGANIZATION 

"  (6)  Proper  provision  must  be  made  for  securing  to  the  syndi- 
cate the  refunding  of  the  money  they  may  advance  on  account  of 
interest  not  exceeding  4  per  cent  per  annum  on  the  general  mortgage 
bonds  during  reconstruction,  and  also  for  the  substitution  of  the 
syndicate  in  the  place  of  any  creditor  or  stockholder  who  may  aban- 
don his  holding  and  refuse  to  pay  his  assessment,  it  being  the  pur- 
pose of  the  syndicate  to  pay  4  per  cent  per  annum  interest  on  the 
general  mortgage  bonds  during  reconstruction,  and  also  to  pay 
the  assessments  of  such  parties  as  may  abandon  their  holdings  or 
right  to  take  the  securities  to  which  they  may  be  entitled  under  the 
plan."  l 

The  correspondence  with  Mr.  Roberts  referred  to  contained  the 
assurance  that  the  Pennsylvania  Company  would  not  hold  aloof 
from  an  understanding  with  the  Reading  either  in  respect  to  the 
coal  or  transportation  business,  and  would,  moreover,  "cordially 
unite  in  the  arbitration  of  all  differences."  2  This  could  not,  of  course, 
force  distasteful  terms  upon  the  Reading  bondholders,  but  it  could 
and  did  supply  sufficient  capital  to  ensure  the  success  of  any  plan 
adopted,  and  it  infused  confidence  and  vigor  into  the  action  of  the 
nearly  discouraged  reorganization  trustees.  The  executive  com- 
mittee which  they  were  to  name  was  perhaps  a  useful  tool,  but  the 
suggestion  of  a  voting  trust  was  a  genuine  contribution,  and  aided 
powerfully  in  securing  necessary  backing  for  future  schemes. 

It  is  to  be  remarked  that  the  syndicate  appeared  with  no  panacea, 
was  without  a  plan  of  its  own,  and  at  first  merely  adopted  that  of  the 
trustees,  with  a  few  modifications  which  it  thought  advisable;  but 
that  by  March,  1886,  it  had  so  worked  over  the  proposals  of  the 
reorganization  trustees  as  to  make  in  many  respects  a  new  plan; 
which  retained  the  assessments,  likewise  the  combination  of  fixed 
and  optional  charges  and  the  use  of  preferred  stock,  but  reserved 
4  per  cent  bonds  against  prior  liens,  gave  4  per  cent  bonds  with  pre- 
ferred stock  in  exchange  for  the  general  mortgage  instead  of  3  per 
cents,  and  created  four  classes  of  stock  instead  of  three.  Somewhat 
more  in  detail  this  plan  was  as  follows :  The  Reading  was  to  issue 
a  new  4  per  cent  general  mortgage  for  $100,000,000,  and  four  kinds 
of  stock:  a  preferred,  income,  consolidated,  and  common.  Of  the 
general  mortgage  $9,792,000  were  to  be  for  future  use  in  the  im- 

1  R.  R.  Gaz.  18:  138,  1886.  »  Chron.  42:  216,  1886. 


PHILADELPHIA    &•  READING  III 

provement  of  the  railway;  of  the  remainder  $38,422,000  were  to  be 
reserved  against  prior  liens;  $24,686,000  were  to  exchange  for  the 
general  mortgage  if  such  should  not  be  paid  off  in  cash ;  $15,000,000 
were  to  take  up  shares  or  bonds  of  leased  lines,  and  $10,000,000 
were  to  exchange  for  or  to  redeem  Coal  &  Iron  Company  divisional 
mortgages.  The  total  amount  issued  was  to  be  $90,208,000,  and 
no  mortgage  in  addition  was  to  be  placed  on  the  Reading  proper- 
ties for  five  years  after  the  reorganization  without  the  consent  of  a 
majority  of  the  preferred  stockholders.  Of  the  different  classes  of 
new  stock  the  preferred  was  to  be  given  dividends  up  to  5  per  cent 
non-cumulative,  and  then  the  income  and  consolidated  stocks  were 
to  have  up  to  5  per  cent  non-cumulative.  Generally  speaking,  the 
preferred  stock  was  to  go  for  assessments;  the  income  stock  for  the 
income  mortgage  and  convertible  adjustment  scrip ;  the  consolidated 
stock  for  the  first  series  55  and  one-quarter  of  the  principal  of  the 
second  series  53 ;  the  common  stock  for  the  rest  of  the  second  series 
55,  for  the  convertible  debentures,  deferred  income  bonds,  and  for 
old  preferred  and  common  stock.  New  fixed  charges  were  estimated 
at  $6,971,687,  which  dividends  on  the  preferred  stock  would  raise 
to  $8,198,636.  There  was  to  be  a  voting  trust  for  five  years,  consist- 
ing of  J.  Lowber  Welsh,  J.  P.  Morgan,  Henry  Lewis,  George  F. 
Baer,  and  Robert  H.  Sayre ;  and  a  syndicate  was  to  advance  neces- 
sary expenditures  and  disbursements  pending  reorganization,  in- 
cluding unpaid  assessments.  The  syndicate  compensation  was  to 
be  6  per  cent  on  its  advances,  plus  a  commission  of  5  per  cent  upon 
its  $15,000,000  of  subscribed  capital.  The  property  was  to  be  sold 
at  foreclosure  sale,  and  a  new  company  was  to  be  organized.1 

A  comparison  of  this  with  the  plan  of  the  reorganization  trustees 
at  first  announced  will  show  the  changes  made.  Nothing  of  value 
which  previous  reorganizations  had  worked  out  was  cast  aside.  The 
fixed  interest  allowed  the  general  mortgage  bondholders  was  raised 
in  the  hope  that  they  might  support  the  plan,  and  more  care  was 
taken  to  follow  the  order  of  priority  in  the  advantages  offered  to  the 
various  classes  of  junior  securityholders ;  an  end  to  which  the  four 
classes  of  stock  were  admirably  adapted.  The  voting  trust  was 
altogether  new,  and  was  doubtless  intended  to  ensure  a  policy  in 

1  Chron.  42:  365,  1896.  Assessments  ranged  from  2}  per  cent  on  the  deferred  in- 
come bonds  to  15  per  cent  on  certain  junior  securities  and  $10  on  both  classes  of  stock. 


112  RAILROAD  REORGANIZATION 

accord  with  the  syndicate's  wishes  for  a  series  of  years,  and  to  pre- 
vent a  renewal  of  the  vagaries  of  Mr.  Go  wen's  administration.  The 
provision  for  foreclosure  was  to  be  expected  in  view  of  the  extreme 
difficulty  of  obtaining  the  assents  of  so  many  conflicting  interests; 
but  with  a  net  revenue  of  $12,026,309  (both  companies)  and  fixed 
charges  of  $6,971,687,  the  task  of  maintaining  the  solvency  of  the 
companies  in  future  did  not  seem  an  impossible  one. 

In  opposition  to  the  plan  the  Lockwood  Committee  urged  that 
the  scheme  was  unjust  to  certain  classes  of  bonds ;  that  it  was  cum- 
bersome, expensive,  conferred  power  on  the  trustees  which  should 
have  been  reserved  for  the  direction  of  the  new  company,  and  that 
the  reserved  powers  to  change  any  part  of  the  plan,  and  the  uncer- 
tainties connected  with  the  settlements  under  it,  involved  risks  which 
creditors  should  not  accept.1  The  objections  were  not  weighty.  If 
the  Lockwood  or  any  other  committee  had  proved  itself  able  to 
formulate  and  carry  through  a  plan,  or  if  the  syndicate  arrangement 
had  been  proposed  at  the  very  beginning  of  the  receivership,  bond- 
holders might  fairly  have  criticised  its  expense.  In  point  of  fact  nu- 
merous attempts  to  reconcile  divergent  interests  had  failed,  and  what 
with  Messrs.  Lockwood,  Bartol,  Whelen,  Gowen,  and  their  respective 
folio  wings,  the  future  offered  no  more  promising  result.  Meanwhile 
bondholders  were  going  without  their  interest,  and  costs  of  the  re- 
ceivership were  mounting  up ;  so  that  a  greater  expense  than  that  of 
which  Mr.  Lockwood  complained  was  being  incurred  by  delay.  As 
for  the  general  mortgage  bondholders,  they  were  given  a  chance  at 
their  old  interest  whenever  the  road  should  earn  it,  and  could  fairly 
ask  no  more;  while  that  it  was  inequitable  to  ask  income  bond- 
holders to  accept  a  reduction  to  $50  in  their  annual  interest,  or 
holders  of  the  first  series  55  to  wait  for  their  interest  until  liens  before 
theirs  had  been  satisfied,  are  conclusions  to  which  few  will  agree. 

In  April  Messrs.  Whelen  and  William  H.  Kemble,  representing  the 
Reading  consolidated  mortgage  bondholders,  announced  that  they 
had  determined  not  to  accept  the  syndicate  plan.  Even  before  this 
Mr.  Gowen  announced  that  he  was  organizing  a  syndicate  and  would 
soon  be  able  to  pay  off  overdue  coupons  on  the  general  mortgage 
bonds,  and  to  prevent  any  foreclosure  under  that  mortgage.2  It  is 
scarcely  necessary  to  say  that  he  had  a  plan  of  his  own.  He  proposed 

1  R.  R.  Gaz.  18:  271,  1886.  2  Ibid.  18:  138,  1886. 


PHILADELPHIA    &  READING  113 

to  issue  $100,000,000  4  per  cent  70- year  consolidated  mortgage  bonds 
much  as  did  the  syndicate,  part  of  which  should  go  to  redeem  the 
general  mortgage  and  the  floating  debt ;  but  second  to  this  he  sug- 
gested a  cumulative  4  per  cent  first  preferred  income  bond,  to  take 
the  place  of  the  income  and  consolidated  stock  under  the  syndicate 
plan,  and  to  be  exchanged  for  the  first  series  55,  a  portion  of  the 
second  series  55,  and  some  of  the  leased  canal  securities ;  while  fin- 
ally he  planned  a  second  preferred  cumulative  4  per  cent  income 
bond,  to  be  exchanged  for  those  securities  down  to  the  deferred 
income  bonds,  which  under  the  syndicate  scheme  were  to  receive  com- 
mon stock.  The  surplus  of  income  offered  by  the  old  general  mort- 
gage was  to  be  made  good  by  first  preference  bonds.  The  existing 
preferred  and  common  stocks  were  to  remain  as  they  were,  and 
the  deferred  income  obligations  were  to  remain  untouched.  Finally, 
the  New  Jersey  Central  was  to  be  retained  in  friendly  alliance,  either 
under  a  modified  lease  at  a  rental  equal  to  earnings,  or  under  a 
special  traffic  contract. 

A  comparison  of  this  with  the  syndicate  plan  shows  that  Mr. 
Gowen  gave  up  the  idea  of  an  assessment ;  provided  for  the  floating 
debt  through  first  preference  bonds;  swept  away  three  of  the  four 
classes  of  stock,  replacing  them  by  two  kinds  of  income  bonds ;  and 
retained  the  deferred  income  bonds  which  the  syndicate  proposed 
to  retire.  His  plan  was  to  be  carried  through  without  foreclosure, 
but  outside  of  this  its  advantages  are  rather  difficult  to  ascertain. 
The  abandonment  of  the  assessment  was  distinctly  bad ;  the  retention 
of  the  deferred  income  issue  was  also  bad;  the  reduction  hi  the 
number  of  kinds  of  securities  tended  towards  simplicity,  but  made 
impossible  the  nice  distinction  of  priority  on  which  the  syndicate  had 
relied ;  while  even  the  replacement  of  stock  by  income  bonds  must 
be  condemned,  substituting  as  it  did  an  obligation  without  any 
very  distinct  character  of  its  own  for  a  stock  which  represented 
frankly  only  a  share  in  the  profits  of  the  enterprise.  These  things 
were  realized,  and  the  plan  received  no  serious  support ;  but  as  every 
plan  so  far  proposed  contributed  something  to  the  final  product,  so 
Mr.  Gowen's  income  bonds  and  his  aversion  to  foreclosure  were  not 
without  influence  upon  the  scheme  which  ultimately  attained  success. 

The  next  few  months  saw  active  hostilities  between  Mr.  Gowen 
and  the  syndicate;  the  former  taking  the  position  that  he  would 


114  RAILROAD  REORGANIZATION 

never  consent  to  foreclosure,  nor  to  the  placing  of  the  property 
for  five  years  under  the  management  of  a  board  of  trustees  named 
by  his  adversaries.1  To  Mr.  Garrett,  chairman  of  the  reconstruc- 
tion trustees,  he  wrote  suggesting  that  the  board  should  substitute 
his  plan  for  that  of  the  syndicate,  and  that  seven  reconstruction 
trustees  should  be  appointed  by  the  managers  of  the  company  to 
carry  it  through.  "Upon  this  being  done,"  said  he,  "I  will  engage 
that  the  plan  shall  be  underwritten  by  an  association  of  capital 
sufficient  for  the  purpose  of  paying  off  all  the  general  mortgage 
bonds  which  do  not  voluntarily  accept  the  new  securities  provided 
by  the  plan,  and  I  will  agree  that  the  financial  responsibility  of 
these  subscribers  to  this  fund  shall  be  determined  by  the  presidents 
of  the  Bank  of  North  America,  the  Farmers'  &  Mechanics'  National 
Bank,  the  Pennsylvania  Company  for  Insurance  of  Lives,  etc.,  and 
the  Union  Trust  Company.  .  .  ."  2  Mr.  Garrett  naturally  refused. 

As  in  many  cases  before,  the  struggle  ended  in  a  compromise. 
The  new  agreement  was  as  follows :  The  syndicate  was  to  be  en- 
larged by  $4,000,000  additional  subscriptions,  and  the  reconstruction 
trustees  increased  to  thirteen  by  the  addition  of  certain  friends  of 
Mr.  Gowen,  one  of  whom  was  also  to  be  given  place  upon  the 
executive  committee.  The  syndicate  plan  was  to  be  carried  through 
without  foreclosure,  providing  sufficient  assents  could  be  obtained, 
and  was  to  be  modified  by  the  substitution  of  first,  second,  and  third 

4  per  cent  income  bonds  for  preferred,  income,  and  consolidated 

5  per  cent  stock.   Dividends  on  the  bonds,  like  those  on  the  stock, 
were  to  be  payable  from  net  earnings  only;  but  net  earnings  were 
defined  as  the  profits  derived  from  all  sources  after  paying  operating 
expenses,  taxes,  and  existing  rentals,  guarantees  and  interest  charges, 
but  not  fixed  charges  of  the  same  sort  subsequently  created.  All  third 
preference  bonds  issued  for  convertible  bonds  were  to  have  the  right 
to  be  converted  into  common  stock ;  and  the  company  was  to  have 
the  privilege  of  increasing  the  issue,  subject  for  five  years  to  the  ap- 
proval of  the  voting  trustees.  As  finally  worked  out,  the  first  prefer- 
ence bonds  were  to  be  given  for  assessments ;  the  second  preference 
for  all  securities  which  had  been  promised  income  or  consolidated 
stock;  and  the  third  preference  for  the  second  series  55,  convertible 
and  debenture  bonds,  and  preferred  stock  to  which  common  stock 

1  Ry.  Age,  n:  376,  1886.  l  R.  R.  Gaz.  18:  502,  1886. 


PHILADELPHIA    &  READING  115 

had  before  been  allotted.  Somewhat  more  emphasis  was  laid  on  the 
possibility  of  paying  off  the  general  mortgage.  It  was  proposed  to 
reduce  the  aggregate  of  rentals  and  guarantees  (exclusive  of  the 
Central  of  New  Jersey,  the  Schuylkill  Navigation  Company,  and 
the  Susquehanna  Canal  Company)  to  an  annual  charge  of  less  than 
$2,350,000  by  direct  negotiation  with  the  companies  affected.  And 
to  deal  directly  with  the  three  companies  above  named  upon  the 
basis  of  a  continuance  of  their  respective  leases  at  rentals  involving 
no  fixed  liability  beyond  the  earning  power  of  the  leased  line,  or  on 
the  basis  of  a  surrender  of  the  said  leases,  and  the  cancellation  of 
the  traffic  agreement  with  the  Schuylkill  Navigation  Company  for 
a  consideration.  The  voting  trust  was  to  be  composed  of  three  repre- 
sentatives of  the  syndicate  and  one  friend  of  Mr.  Gowen,  which  four 
should  elect  a  fifth  who  should  be  satisfactory  both  to  the  syndicate 
and  .to  the  reconstruction  trustees.  A  united  effort  was  to  be  made 
by  the  company,  the  reconstruction  trustees,  and  the  syndicate  to 
secure  the  immediate  appointment  of  Mr.  Austin  Corbin  as  an 
additional  receiver ;  and,  if  Mr.  Corbin  would  take  the  position  and 
legally  qualify  himself  to  fill  it,  it  was  understood  that  the  presidency 
of  the  company  would  be  offered  to  him.  The  other  provisions  of 
the  syndicate  plan  were  to  remain  unchanged.1 

The  total  capital  and  charges  under  the  plan  were  to  be  as  follows : 

Est'd  Capital      Fixed  Charges 

Prior  mortgage  liens,  $85,807,920  $4,233,055 

Annual  rental  of  leased  lines  not  to  exceed  2,350,000 

$6,583,055 
First  preference  income  mortgage,  24,410,822  1,220,542 

$110,218,742  $7,803,597 

Second  preference  income  mortgage,  26,140,518  1,307,026 

$i36,359,200  $9,110,623 

Third  preference  income  mortgage,  14,956,016  747,800 

$151,315,276  $9,858,423 

Common  stock,  38,369,076 

Deferred  incomes,  $20,751,090  at  issue  price,  6,225,327 

$195,909,679 

We  have  now  the  reorganization  in  its  final  shape,  and  it  will  be 
interesting  to  review  briefly  the  gradual  way  in  which  this  shape 
was  fashioned.  With  the  company  plunged  anew  into  bankruptcy 

1  Chron.  43:  368,  1886;  Ibid.  43:  747,  1886;  Annual  Report,  1887. 


Il6  RAILROAD  REORGANIZATION 

after  a  reorganization  insufficient  to  afford  any  genuine  relief,  the 
proposal  was  made  to  fund  one-half  the  general  mortgage  coupons 
for  three  years  and  to  convert  all  junior  claims  into  liens  on  income. 
This  scheme  failed  because  plainly  inadequate  to  meet  the  needs 
of  the  situation,  and  a  modified  version  was  presented  providing 
for  an  assessment  with  which  to  pay  the  floating  debt.  The  assess- 
ment was  approved,  but  not  the  plan,  and  an  ensuing  scheme  sup- 
plied an  altogether  new  method  of  treatment,  whereby  on  the  one 
hand  the  assessment  was  made  more  heavy,  and  on  the  other 
two  classes  of  preferred  stock  were  proposed,  with  one  issue  of 
bonds  at  3  per  cent.  This  plan  failed,  not  so  much  because  of  its 
inadequacy,  although  it  was  inadequate,  but  because  general  mort- 
gage bondholders  felt  that  a  3  per  cent  bond  was  less  than  they 
could  reasonably  expect  for  their  holdings,  and  insisted  on  a  secur- 
ity with  a  higher  obligatory  rate  of  interest.  The  next  plan  .took 
note  of  these  objections :  it  raised  the  interest  on  the  bonds  which  it 
proposed  from  3  to  4  per  cent;  and  in  the  endeavor  to  please  the 
junior  bondholders  as  well,  created  four  classes  of  preferred  stock, 
by  means  of  which  the  relative  priority  of  different  issues  was  care- 
fully and  completely  recognized.  Assessments  were  retained,  and 
a  guarantee  by  a  syndicate  and  a  voting  trust  for  five  years  was 
suggested.  In  the  discussion  that  followed,  a  new  scheme  was  in- 
troduced, which  replaced  the  preferred  stock  by  two  classes  of 
income  bonds,  and  forced  the  managers  to  realize  the  desire  of  the 
old  bondholders  for  some  new  security  with  at  least  the  name  of 
bond.  As  a  result,  the  syndicate  which  had  fathered  the  previous 
plan  consented  to  substitute  for  three  of  their  classes  of  stock  first, 
second,  and  third  preference  bonds.  Meanwhile  the  fixed  charges 
estimated  for  the  successive  plans  steadily  decreased.  The  first 
looked  for  $12,911,000,  or  $14,266,051  as  variously  reckoned; 
the  second  for  $14,143,384,  or,  deducting  the  Jersey  Central,  for 
$8,223,177;  the  third  for  $7,064,830;  the  fourth  for  $6,971,687; 
and  the  sixth  for  $6,583,055.  Thus  each  plan  took  over  what  was 
most  satisfactory  in  its  predecessor ;  and  there  was  on  the  one  hand 
a  steady  decrease  in  the  fixed  charges  proposed,  and  on  the  other 
a  continuous  effort  to  discover  some  plan  which  might  be  satis- 
factory to  all  concerned. 

That  the  compromise  plan  last  mentioned  succeeded  was  in  part 


PHILADELPHIA    &  READING  117 

due  to  the  feeling  of  all  contending  parties  that  concessions  must  be 
made;  it  was  due  also  to  endorsement  by  the  leaders  of  the  more 
important  interests;  and,  finally,  to  an  appreciation  that  the  plan 
was  after  all  a  good  one,  reducing  largely  the  fixed  charges  which 
the  company  would  have  to  pay,  while  depriving  no  one  of  a  return 
which,  under  the  circumstances,  he  could  fairly  expect  to  receive. 
Mr.  Corbin  proved  willing  to  undertake  the  new  responsibilities 
put  upon  him.  He  was  therefore  appointed  receiver  in  October, 
and  elected  president  in  the  January  following. 

Nevertheless,  it  would  be  a  mistake  to  suppose  that  the  plan 
was  unanimously  accepted  from  the  start.  The  Lockwood  Com- 
mittee of  general  mortgage  bondholders  were  prompt  in  their 
disapproval,  pronouncing  it  "unjust,  uncertain,  and  indefinite"; 
saying  that  reorganization  under  it  would  be  unduly  expensive, 
and  that  it  was  more  objectionable  than  the  plans  which  had 
preceded  it.1  Equally  decided  was  a  small  group  of  capitalists 
which  held  a  majority  of  the  first  series  55  outstanding,  the  members 
of  which  were  said  to  have  agreed  to  hold  their  bonds  and  to  abide 
the  result.2  The  original  time  limit  for  deposits  expired  on  March  i, 
1887;  it  was  then  extended  to  March  15,  and  again  to  March  31, 
and  deposits  of  $110,409,464  out  of  a  total  of  $117,972,859  were 
secured.  By  October  certain  other  bondholders  had  been  induced 
to  come  in,  and  the  trustees  declared  the  plan  operative.  Holders  of 
$3,348,000  of  first  series  55  stayed  out,  and  forced  an  arrangement 
by  which  they  were  practically  paid  off  in  cash.3  Arrangements 
were  made  with  some  of  the  subsidiary  Reading  lines,  but  the  lease 
of  the  Central  of  New  Jersey  was  not  renewed.  Only  odds  and 
ends  now  remained  to  be  cleared  up,  and  all  through  the  rest  of 
the  year  the  managers  were  busy  paying  off  receivers'  certificates, 
floating  debt,  overdue  interest,  etc.  On  January  i,  1888,  without 
formalities,  the  Reading  passed  out  of  receivers'  hands  and  into 
the  control  of  the  stockholders. 

1  R.  R.  Gaz.  18:897,  1886. 

2  Ry.  Age,  12:  692,  1887.  These  bondholders  even  proposed  a  plan  of  reorganiza- 
tion of  their  own,  which  it  is  not  worth  while  going  into. 

3  Ry.  Age,  12:  746,  1887;  Chron.  45:  539,  1887. 


CHAPTER   IV 

PHILADELPHIA  &  READING 

Difficulties  of  the  Coal  &  Iron  Company  —  McLeod's  policy  of  extension — Col- 
lapse of  this  policy  —  Failure  of  company  —  Summary  of  subsequent  history. 

WITH  the  year  1888  ^  new  period  in  the  history  of  the  Reading 
began.  The  long  struggle  to  bring  the  company  back  to  solvency 
was  fairly  over,  and  for  the  first  time  in  seven  years  the  road  saw 
before  it  a  chance  for  genuine  prosperity.  Unlike  the  reorganization 
of  1880-3,  tnat  °f  1884-7  succeeded  in  accomplishing  the  greater 
part  of  the  saving  expected  of  it.  According  to  the  plan,  interest 
charges  were  to  be  reduced  to  $4,233,055; — in  1888  they  were 
$4,516,433,  and  in  1889  $4,058,139;  rentals  were  not  to  exceed 
$2,350,000;  —  in  1888  they  were  $2,882,582,  and  in  1889  $2,842,- 
319.  Other  payments,  it  is  true,  the  necessity  for  which  was  passed 
over  by  the  advocates  of  the  plan,  raised  the  total  which  the  road 
was  obliged  to  meet,  but  did  not  prevent  a  comfortable  balance 
of  over  $2,000,000  for  the  Railroad  Company  in  1888,  and  one  of 
$1,444,000  for  both  Railroad  and  Coal  Companies  combined. 
During  the  next  few  years  large  sums  were  spent  in  improving  the 
permanent  way.  By  January,  1889,  almost  the  entire  line  between 
New  York  and  Philadelphia  had  been  relaid  with  85  and  90  pound 
rails ;  grades  had  been  smoothed,  bridges  strengthened,  and  culverts 
strengthened  or  rebuilt. 

Less  satisfactory  than  the  results  for  the  Railroad  Company, 
however,  were  those  for  the  Coal  &  Iron  Company.  In  this  case 
profits  of  $654,211  for  1887  turned  into  a  loss  of  $806,222  for  1888, 
and  in  the  following  year  a  weak  demand  for  coal,  combined  with  a 
high  cost  of  mining,  increased  the  loss  to  $974,373.  President  Corbin 
felt  called  upon  to  explain  that  prior  to  1886  the  deficits  of  the 
Coal  Company  had  been  habitually  met  by  inflating  the  capital 
account  of  the  Railroad  Company ;  so  that  with  allowance  for  this 
fact  the  showing  of  the  companies  under  his  management  had  been 
relatively  good.1  In  November,  1889,  a  letter  of  Mr.  Gowen's  was 
issued,  hopeful  as  ever,  criticising  the  management  for  their  refusal 
1  R.  R.  Gaz.  22 :  370,  1890. 


PHILADELPHIA    &  READING  119 

or  neglect  to  give  authoritative  information  about  actual  earnings, 
but  pointing  to  the  large  expense  for  new  coal  cars,  barges,  and  col- 
lieries, and  explaining  the  benefit  which  these  would  confer.1 

The  weakened  position  of  its  allied  company  pulled  the  Reading 
down,  and  prevented  it  from  attaining  the  secure  position  which 
had  seemed  in  sight.  The  payment  of  dividends  only  increased  the 
general  dissatisfaction.  In  February,  1889,  holders  of  a  consider- 
able amount  of  second  preference  bonds  circulated  a  petition  object- 
ing to  the  official  statement  of  net  earnings  applicable  to  these 
securities,  and  demanded  an  examination  of  the  books.  After 
an  investigation  their  expert  declared  that  a  yj  per  cent  dividend 
had  been -earned,  but  the  bondholders  could  not  induce  the  com- 
pany to  increase  its  distribution.  The  next  year  preference  bond- 
holders fared  even  worse.  The  managers  declared  that  the  surplus 
over  all  fixed  charges  for  the  year  was  barely  $100,000,  and  that 
no  dividends  at  all  upon  their  holdings  could  be  paid.  Again  an 
investigation  was  demanded  and  accorded,  and  Mr.  Howard 
Lewis,  the  expert  appointed,  reported  that  there  was  applicable 
to  the  payment  of  interest  upon  first  preference  bonds  the  sum  of 
$90,101,  or  |  of  one  per  cent ;  a  sum  which  the  company  promptly 
agreed  to  pay.  Meanwhile  even  the  stockholders  were  becoming 
restless.  In  June,  1889,  a  suit  was  commenced  in  Philadelphia, 
praying  that  the  company's  voting  trustees  and  the  trust  under 
which  they  acted  should  be  set  aside,  on  the  ground  that  the  trust 
was  to  be  exercised  by  five  voting  trustees,  whereas  only  four  had 
ever  been  appointed.  Later  on  the  matter  was  taken  up  by  London 
stockholders,  and  became  serious  enough  to  force  a  concession  of 
two  seats  in  the  board  of  managers  of  the  company. 

There  was  no  question  but  that  the  trouble  was  caused  by  de- 
pression in  the  anthracite  coal  business,  for  in  the  carriage  of  both 
passengers  and  freight  the  Reading  in  these  years  made  steady 
and  substantial  gains.  In  the  three  years  following  1887  the  number 
of  passengers  transported  increased  by  2,400,0x30  and  the  earnings 
from  them  by  $470,000;  while  the  freignt  tons  moved  gained 
1,500,000  and  the  freight  earnings  $1,000,000.  Only  in  coal  was 
there  a  decrease,  which  appeared  for  the  Coal  &  Iron  Company 
in  the  figures  for  sales  and  gross  and  net  receipts,  and  for  the  Rail- 

1  Chron.  50:37,  1890. 


120  RAILROAD  REORGANIZATION 

road  Company  in  the  earnings  from  anthracite  transported.  The 
result  was  an  attempt  to  improve  the  situation :  first,  by  a  combina- 
tion among  coal  producing  roads  which  should  raise  the  selling 
price  of  that  commodity ;  and  second,  by  extension  of  the  railroad 
into  new  markets,  whereby  an  outlet  for  increased  production 
should  be  obtained.  At  the  instigation  of  Mr.  Gowen  a  syndicate 
was  formed  to  purchase  a  majority  of  the  stock  of  the  Reading 
Company,1  which  bought  much  more  than  50  per  cent,  even  though 
Mr.  Gowen,  the  prime  mover,  died  in  the  mean  time.  The  existing 
managers  showed  no  desire  to  combat  the  movement,  although  the 
voting  power  lay  entirely  in  their  hands.  In  June,  1890,  President 
Corbin  resigned,  and  Mr.  A.  A.  McLeod  was  elected  in  his  place. 
Mr.  McLeod  now  began  a  vigorous  policy  of  consolidation  and 
expansion  with  the  lease  for  the  second  time  of  the  Central  of  New 
Jersey.  He  evaded  a  New  Jersey  law  which  forbade  the  lease  of  a 
domestic  to  a  foreign  corporation  by  incorporating  the  Port  Reading 
Railroad  Company  and  then  executing  a  lease  of  the  Central  to 
this  minor  corporation.2  The  Port  Reading  promised  7  per  cent  on 
the  Central  stock  or  999  years,  plus  one-half  the  surplus  earnings 
above  the  dividend  up  to  10  per  cent,  and  secured  a  guarantee  of 
the  fulfilment  of  these  promises  from  the  Reading  Railroad  proper. 
Finally,  Mr.  McLeod  leased  the  Lehigh  Valley  to  the  Reading 
direct,  on  a  guarantee  of  5  per  cent  on  the  stock  until  May  31, 1892 ; 
6  per  cent  from  that  time  until  November  30,  and  7  per  cent  there- 
after for  the  rest  of  the  999  years.  So  far  as  control  over  the  coal 
supply  was  concerned  this  put  the  Reading  in  a  very  favorable 
position.  The  Lehigh  Valley  tapped  the  northern  Wyoming  field, 
and  the  Central  of  New  Jersey  the  Mahanoy  and  Shamokin  deposits, 
and  both  had  access  to  New  York  through  New  Jersey.  The 
Lehigh,  moreover,  extended  to  Buffalo ;  and  with  a  line  of  steamers 
to  Duluth,  Milwaukee,  and  Chicago,  promised  to  command  a  large 
proportion  of  east-bound  traffic  in  other  things  than  coal.  Figures 
for  the  coal  industry  show  that  the  Reading,  Central,  and  Lehigh 
shipped  in  1891  53.3  per  cent  of  the  total  production  of  40,448,000 
tons;  in  1890  55.5  per  cent ;  and  in  1889  57.75  per  cent.  In  addition, 
control  of  the  Delaware,  Lackawanna  &  Western  was  said  to  have 

1  Chron.  53:408,  1891. 

8  Chron.  54 :  288,  1892 ;  Industrial  Commission,  vol.  19,  pp.  455-7. 


PHILADELPHIA    &  READING  121 

been  acquired  by  the  purchase  of  a  majority  of  its  stock,  which 
added  15.1  percent  more;1  making  a  total  of  68.4  percent  for  the 
year  1891,  or  sufficient  to  give  a  considerable  measure  of  control 
over  prices.  But  the  terms  were  severe ;  quite  as  severe  as  in  the  case 
of  the  leases  earlier  put  through;  and  though  the  Reading  was  hi 
better  shape  than  it  had  been  five  years  before,  full  interest  on  its 
preference  bonds  was  not  being  paid,  and  so  long  as  this  continued 
no  outside  payments  could  properly  be  made.  The  subsidiary 
companies,  on  the  other  hand,  were  not  earning  the  dividends 
promised  on  their  stock  by  nearly  one-third  of  a  million  dollars; 
and  it  seemed  unlikely  that  sufficient  economies  could  be  secured 
to  cover  permanently  the  deficit.  The  question  could  fairly  have 
been  asked  whether  the  Reading  had  not  bought  a  chance  to  con- 
tribute an  annual  sum  to  the  Lehigh  Valley  and  Jersey  Central 
stockholders ;  and  whether  these  roads  had  not  deliberately  entered 
into  a  contract  which  was  little  likely  to  be  carried  out.  The  justi- 
fication of  the  arrangement  lay  in  the  control  of  coal  prices  which  it 
made  possible,  and  in  the  advantages  of  close  traffic  arrangements 
and  connection  with  both  Philadelphia  and  New  York.  "The  main 
reason  why  the  combination  failed,"  said  Mr.  I.  L.  Rice  before 
the  Industrial  Commission,  "was  that  there  was  not  an  understand- 
ing of  the  first  principles  of  an  operation  of  that  kind,  i.  e.  that  it 
must  reduce  prices  and  not  increase  them.  The  anthracite  coal 
combination  was  killed  because  prices  were  immediately  put  up.  .  .  . 
"Q.  Mr.  McLeod  has  testified  before  this  commission  that  it 
was  his  intention  to  effect  such  economies  as  should  be  reflected 
in  lower  prices.  Do  we  understand  that  you  criticise  the  policy  in 
that  it  did  not  so  reduce  the  prices  ? 

"A.  He  did  not  do  it,  no  matter  what  his  intention  was."  2 
The  situation  was,  however,  as  clearly  understood  by  the  public 
as  by  the  managers  themselves.  Even  before  the  combination  had 
begun  to  carry  out  its  policy,  outcry  was  made,  and  as  prices  went 
up  the  agitation  became  intense.  In  New  Jersey  an  act  to  legalize 
the  combination  which  passed  both  houses  was  vetoed  by  Governor 
Abbot  on  the  ground  of  the  effect  upon  the  price  of  anthracite  coal  ;3 
and  in  June  the  Attorney- General  applied  for  an  injunction  to 

1  R.  R.  Gaz.  24:  138,  1892.  2  Industrial  Commission,  vol.  9,  p.  738. 

8  Annual  Report,  1892. 


122  RAILROAD  REORGANIZATION 

dissolve  the  lease  of  the  New  Jersey  Central  to  the  Philadelphia  & 
Reading,  alleging  that  the  tripartite  agreement  between  these 
companies  and  the  Philadelphia  &  Reading  was  illegal.  The  court 
granted  a  temporary  injunction,1  which  it  continued  in  August  to 
a  final  hearing,  with  conditions  to  make  it  more  effective. 

Prices  did  not  go  down,  and  in  October  Attorney- General  Stockton 
of  New  Jersey  again  appeared  before  Chancellor  Me  Gill.  He 
now  charged  the  Philadelphia  &  Reading,  the  Central,  and  the 
Port  Reading  with  having  conspired  to  advance  the  price  of  coal  in 
defiance  of  the  order  of  the  court,  and  asked  for  the  appointment 
of  a  receiver  to  enforce  the  former  decree,  and  to  restrain  the  com- 
pany from  further  using  the  New  Jersey  railroads  for  carrying  any 
coal  until  the  advanced  price  should  have  been  reduced.2  The  officers 
denied  the  allegations,  but  the  Chancellor  sustained  the  Attorney- 
General  on  every  point ;  and  only  the  official  announcement  of  the 
abrogation  of  the  lease  prevented  the  granting  of  the  order.3  The 
lease  of  the  Lehigh  Valley  fared  better.  In  a  suit  brought  by  M.  H. 
Arnot,  a  stockholder  in  the  Lehigh  Valley,  Judge  Metzger  of  the 
Court  of  Common  Pleas  held  that  the  Reading  and  Lehigh  Valley 
were  not  parallel  and  competing  lines  in  the  sense  contemplated 
by  the  law ;  and  that  mere  incidental  competition  between  branches 
or  spurs  of  two  systems  would  not  prevent  the  consolidation  of  their 
main  lines.4  So  much  then  of  the  original  programme  was  allowed 
to  stand. 

Meanwhile,  in  the  search  for  new  markets,  the  Reading  had 
stretched  into  New  England,  having  chosen  that  territory  in  the 
hope  of  increasing  its  tonnage  without  a  desperate  struggle  with  its 
neighbors.5  The  most  available  subject  for  control  was  the  Boston  & 
Maine,  which  reached  from  Northampton  and  Boston,  Massachu- 
setts, to  Portland,  Maine,  was  independent  of  the  large  trunk  lines, 
and  had  a  profitable  local  business  of  its  own.  Purchases  of  this  rail- 
road's stock  were  quietly  made ;  and  in  October,  1892,  the  public  was 
surprised  by  the  election  of  Mr.  McLeod  to  the  presidency,  although, 
as  it  subsequently  transpired,  an  actual  majority  of  Boston  &  Maine 
stock  was  not  secured.6  It  was  obvious  that  nothing  could  be  gained 

1  R.  R.  Gaz.  24:420,  1892.  2  Chron.  55:680,  1892. 

3  Chron.  56:82,  1893.  4  R.  R.  Gaz.  25:  102,  1893. 

6  Industrial  Commission,  vol.  9,  p.  567,  testimony  of  A.  A.  McLeod. 
8  Ibid.  vol.  9,  p.  574. 


PHILADELPHIA    &•  READING  123 

from  the  new  arrangement  unless  the  gap  between  the  Reading  and 
the  Boston  &  Maine  should  be  filled ;  and  so,  even  before  the  pur- 
chase of  stock  in  the  latter  was  begun,  the  lease  of  the  Poughkeepsie 
Bridge  across  the  Hudson  was  put  through,1  and  a  controlling 
interest  was  bought  in  the  stock  of  the  Central,  New  England  & 
Western.  The  last-named  road  extended  from  Hartford,  Connec- 
ticut across  the  Poughkeepsie  Bridge  to  Campbell  Hall,  145^  miles, 
and  connected  at  this  point  with  the  Pennsylvania,  Poughkeepsie  & 
Boston,  a  road  controlled  in  the  interest  of  the  Reading.  This  com- 
pleted a  through  route  from  Philadelphia  to  Hartford.  Later  the 
Central,  New  England  &  Western  Railroad  Company  and  the 
Poughkeepsie  Bridge  Railroad  Company  were  consolidated  into 
the  Philadelphia,  Reading  &  New  England,  with  Mr.  McLeod  as 
president ; 2  and  a  controlling  interest  was  purchased  in  the  New 
York  &  New  England  Railroad,  which  ran  from  Poughkeepsie  via 
Hartford  and  Providence  to  Boston,3  and  afforded  another  entrance 
into  New  England.  All  this  involved  a  very  great  extension  of  the 
Reading  system.  The  lease  of  the  Lehigh  Valley  had  connected  it 
with  Buffalo;  the  subsequent  consolidations  brought  it  into  every 
New  England  state,  and  gave  it  a  total  mileage  of,  roughly,  5000 
miles. 

Danger  lay  in  two  directions.  First,  it  was  possible  that  even  the 
union  of  the  Lehigh,  Jersey  Central,  and  the  Reading  might  fail  to 
secure  a  profit  for  the  mining  end  of  the  business,  and  second,  the 
financing  of  the  New  England  deals  might  be  so  conducted  as  to 
put  the  parent  road  into  a  very  difficult  situation. 

Both  these  contingencies  occurred.  The  early  termination  of  the 
Jersey  Central  lease  weakened  the  control  of  the  Reading  over 
prices,  while  the  severity  of  the  winter  of  1893,  though  assisting  to 
maintain  prices,  so  increased  the  expense  of  operating  the  mines 
that  earnings  fell  below  fixed  charges  for  the  three  months  ending 
February  28,  1893,  by  the  amounts  of  $933,443  for  the  Railroad 
Company  and  $468,362  for  the  Coal  &  Iron  Company.  More- 
over, losses  of  $616,351  accrued  during  the  same  time  under  the 
Lehigh  Valley  lease,  and  were  met  by  the  Reading,  contrary  to 
expectation,  and  contrary  to  the  express  provisions  of  the  mortgage 
by  which  its  income  bonds  were  secured.  In  order  to  accomplish 

1  Ry.  Age,  17:  109,  1892.   2  Ry.  Rev.  32:  507,  1892.   3  Chron.  55:  723,  1892. 


124  RAILROAD  REORGANIZATION 

the  New  England  extensions  shares  were  bought  on  margin  by  Pre- 
sident McLeod  personally  with  collateral  in  part  supplied  by  himself, 
in  part  taken  from  the  treasury  of  the  company,  and  consisting  of 
general  mortgage,  collateral  trust,  and  income  bonds.  "  On  or  about 
September  22,"  said  Mr.  I.  L.  Rice,  a  representative  of  the  bond- 
holders, who  had  been  examining  the  books,  "Mr.  McLeod  entered 
into  certain  individual  stock  transactions  which  resulted  in  the  pur- 
chase of  24,036  shares  of  the  stock  of  the  Boston  &  Maine  Railroad 
Company  and  32,000  shares  of  the  stock  of  the  New  York  &  New 
England  Railroad  Company.  On  October  15, 1892,  he  withdrew  from 
the  control  of  the  company,  without  having  previously  obtained  the 
authority  of  the  board  of  managers  therefor,  and  without  express- 
ing the  purpose  for  which  he  intended  to  use  the  securities,  30,000 
general  mortgage  bonds  of  the  company,  which  as  afterwards 
appeared  were  used  at  that  time  as  margins  in  the  transaction. 
He  subsequently  withdrew  from  the  control  of  the  company  in  the 
same  manner  and  for  the  same  purpose,  between  October  28  and 
December  i,  1892,  $713,000  of  collateral  trust  bonds,  and  $99,000 
third  preference  bonds.  No  reference  whatever  is  made  to  these 
stock  transactions  on  the  books  of  the  company  except  the  mention 
of  the  withdrawal  of  securities  against  the  personal  receipt  of  the 
president,  nor  are  they  referred  to  on  the  minutes  of  the  board  of 
managers  prior  to  December  24,  1892.  On  the  latter  date  the  board 
of  managers  in  a  resolution  approved  the  transaction,  calling  for  the 
use  of  $613,000  of  the  company's  collateral,  and  indemnifying  Mr. 
McLeod  for  advances  made  for  the  same  purpose  to  the  extent  of 
$400,000.  On  January  17,  1893,  Mr-  McLeod  deposited  $250,000 
additional  collateral  trust  bonds  as  margin,  making  a  total  of 
$963,000.  On  February  15  Mr.  McLeod  directed  that  the  account 
be  transferred  from  his  individual  name  to  that  of  the  company's."  l 
Leaving  aside  the  matter  of  the  propriety  of  Mr.  McLeod's 
action,  it  is  plain  that  the  method  which  he  employed  was  an 
extremely  expensive  one,  in  that  it  raised  the  necessary  cash  by 
temporary  loans  at  high  rates  from  brokers  in  New  York  and  Phil- 
adelphia instead  of  by  the  sale  of  stocks  or  bonds,  or  by  the  use  of 
funds  which  the  company  might  have  had  on  hand.  According  to 
President  Harris,  the  average  charges  paid  on  the  floating  debt  in 

1  R.  R.  Gaz.  25:  386,  1893. 


PHILADELPHIA    &  READING  125 

1892,  a  large  portion  of  which  had  been  accumulated  in  these  opera- 
tions, was  9  per  cent.  If  the  control  over  the  corporations  acquired 
had  been  desired  for  temporary  reasons  the  operation  would  have 
been  a  stock  speculation  pure  and  simple,  and  the  Reading  would 
have  trusted  to  the  possible  rise  in  price  of  the  securities  purchased 
to  cancel  the  expense  of  advances  to  the  brokers  who  did  the  buy- 
ing; but  in  this  case  the  control  was  designed  to  be  permanent, 
not  temporary,  and  Mr.  McLeod  expected  results  which  could  be 
obtained  only  after  a  series  of  years. 

This  brings  us  to  the  beginning  of  1893.  Mr.  McLeod  had  suc- 
ceeded in  carrying  out  his  plans  for  a  combination  of  coal  producing 
roads  and  for  the  extension  of  the  Reading  into  New  England, 
but  had  seen  his  first  project  bitterly  attacked,  and  his  second 
scheme  become  a  burden  because  of  the  insufficient  funds  behind  it. 
Matters  came  to  a  head  in  February  with  an  attempt  to  borrow  on 
$10,000,000  collateral  trust  bonds.  Speyer  &  Co.  accepted  the  issue, 
but  the  Drexels  refused  to  handle  it,  and  began  to  sell  the  com- 
pany's securities  at  any  price.1  Quotations  dropped  from  46!  to  40! 
on  February  17,  and  continued  to  fall  the  two  succeeding  days, 
reaching  28  on  February  20.  On  this  last  day  application  was  made 
to  the  United  States  Circuit  Court  in  Philadelphia,  and  Messrs. 
McLeod,  Wilbur,  and  Paxon  were  appointed  receivers.  "  I  am  very 
sorry,"  said  President  McLeod,  "that  we  were  driven  to  the  neces- 
sity for  a  receivership,  but  it  was  the  only  thing  to  do.  Our  credit 
was  attacked  in  a  way  which  made  it  impossible  for  us  to  meet  our 
obligations,  and  we  had  the  receivership  established  before  the 
property  was  further  injured.  .  .  .  The  trouble  was  brought  about 
by  the  fact  that  we  were  doing  an  enormous  business  on  a  small 
capital,  and  when  this  attack  was  made  ...  it  hurt  our  credit  so 
that  we  could  not  borrow  money." 2  Lack  of  capital  was  the  repeated 
cry  of  the  management.  At  a  later  date  Mr.  McLeod  again  said, 
"  When  I  leased  the  Lehigh  Valley  and  the  Jersey  Central  and  took 
over  their  coal  operations  ...  I  found  that  I  had  $13,000,000 
invested  in  coal  and  in  carrying  the  customers  of  the  companies. 
The  Reading  did  not  have  that  much  capital,  and  I  had  to  borrow 
$8,000,000  of  that  $13,000,000.  Then  the  panic  of  1893  came  on. 
I  had  arranged  to  fund  that  $8,000,000  of  floating  debt  by  selling 

1  Ry.  Age,  18:  314,  1893.  '  Ibid.  18:  164,  1893. 


126  RAILROAD  REORGANIZATION 

securities,  etc.,  giving  me  a  working  capital  of  $17,500,000,  but 
the  parties  who  were  to  furnish  the  money  had  six  months  in  which 
to  do  it,  and  on  account  of  that  panic  coming  on  before  I  could  get 
the  money,  there  was  nothing  in  the  world  for  me  to  do  except  to 
put  the  Reading  in  the  hands  of  the  receivers  to  save  its  securities."  * 
The  statements  concerning  the  lack  of  capital  were  a  true  explanation 
though  not  an  excuse.  Money  had  been  tied  up  in  unsalable  coal, 
acquired  not  only  by  the  leases  of  the  Lehigh  and  Central,  but  also 
by  purchases  from  independent  operators  2  and  by  production  during 
the  current  year;3  while  whatever  spare  funds  the  Reading  had 
been  able  to  provide  had  been  put  into  New  England  securities  at 
high  prices  to  carry  out  the  road's  ambitious  plans.  In  the  mean 
time  the  large  purchases  on  margin  made  a  fall  in  the  price  of 
Reading  securities  of  especial  moment;  and,  as  Mr.  McLeod  ex- 
plained, it  proved  impossible  to  liquidate  the  floating  debt.  The 
failure  of  1893,  then,  was  caused  less  by  a  continued  inability  to 
meet  fixed  charges  than  by  an  undue  expansion  of  operations  such 
as  has  ruined  many  a  solvent  firm.  Reading's  venture  in  the  coal 
fields  had  not  proved  a  success,  but  the  loss  had  not  been  sufficient 
to  ruin  it  within  a  year ;  its  New  England  extensions  had  not  brought 
all  the  results  desired,  but  they  had  not  had  a  fair  trial;  the  true 
cause  for  the  failure  was  the  attempt  to  accomplish  by  means  of 
stock  speculation  and  temporary  loans  at  high  rates  more  than  the 
road  could  do  out  of  its  legitimate  resources,  with  the  intent  on  the 
one  hand  to  raise  the  price  of  coal  and  on  the  other  to  secure  fresh 
markets  for  the  sale  thereof. 

After  the  failure  the  first  impulse  of  the  bondholders  was  to 
denounce  Mr.  McLeod.  A  meeting  of  European  creditors  in 
London  chose  a  committee  to  represent  them  and  solicited  McLeod 's 
removal  from  the  receivership  on  the  "serious  ground"  that  the 
administration  of  their  property  should  not  any  longer  be  jeop- 
ardized by  remaining  under  the  control  of  an  official  who  had 
already  brought  it  into  its  existing  difficulties.  A  New  York  general 
mortgage  bondholders'  committee  decided  to  act  in  a  similar  direc- 
tion, and  Mr.  Drexel  represented  to  the  president  that  he  should 
resign  for  the  sake  of  the  future  of  the  company.4  Mr.  McLeod 

1  Industrial  Commission,  vol.  9,  p.  573.  2  Ibid. 

8  Ry.  Times,  63:  265,  1893.  4  Ry.  Age,  18:  314,  1893. 


PHILADELPHIA    &  READING  127 

unwillingly  gave  way.  For  successor  the  board  of  managers  chose 
Mr.  Joseph  S.  Harris,  a  man  of  long  experience  in  railroad  affairs. 
Mr.  Harris  had  been  for  many  years  connected  with  the  Lehigh 
Valley  system,  and  was  the  same  man  who,  it  will  be  remembered, 
had  evaluated  the  Reading  coal  properties  in  1880.  Following 
his  election  as  president  he  was  appointed  receiver  in  the  place  of 
Mr.  McLeod. 

The  receivers'  statement  came  out  in  March  and  announced  a 
floating  debt  of  $18,472,828,  against  which  were  held  reported 
assets  to  the  amount  of  $15,779,784;  but  of  these  last  $4,985,276 
were  in  the  shape  of  coal,  and  $8,861,065  consisted  of  the  items 
"due  for  freight,"  "tolls  due  from  connecting  roads,"  "bills  receiv- 
able," "cash,"  etc.,  a  large  part  of  which  was  probably  of  little 
worth.  Both  the  current  liabilities  and  the  current  assets  are  in- 
structive, and  show  that  on  the  one  hand  Mr.  McLeod's  stock 
operations  had  involved  the  company  in  heavy  obligations  to  his 
brokers,  and  that  on  the  other  losses  in  the  coal  business  had 
necessitated  current  advances  to  branch  lines  from  which  it  was 
impossible  to  get  return.  It  appears,  for  instance,  that  the  Coal  & 
Iron  Company  had  been  unable  to  pay  the  sums  charged  it  for 
freight,  and  while  the  full  amounts  had  been  nevertheless  included 
in  reported  earnings,  the  actual  result  had  been  a  swelling  of  bills 
receivable  by  debts  which  the  Railroad  Company  was  quite  unable 
to  collect.1 

The  general  lines  of  the  policy  to  be  pursued  were  now  sufficiently 
clear;  the  more  pressing  claims  were  to  be  met  by  the  issue  of 
receivers'  certificates,  expenses  were  to  be  cut  down,  payments 
under  leases  were  to  be  amicably  reduced  where  possible,  holdings 
of  Boston  &  Maine  stock  were  to  be  sold,  and  on  the  side  of  the 
bondholders  the  various  interests  were  to  agree  on  some  scheme 
for  raising  cash  and  for  improving  the  general  condition  of  the 
property.  There  was  need  for  some  reduction  of  fixed  charges,  but 
not  for  such  radical  cuts  as  in  1880  or  in  1884. 

The  receivers  and  managers  carried  out  their  part  of  the  work 
first.  Application  was  made  in  March,  and  again  in  June,  for  per- 
mission to  issue  certificates  in  settlement  of  the  most  urgent  claims. 
In  May  Mr.  McLeod  resigned  the  presidency  of  the  Boston  &  Maine 

1  Industrial  Commission,  vol.  9,  p.  739,  testimony  of  I.  L.  Rice. 


128  RAILROAD  REORGANIZATION 

after  a  large  part  of  the  Reading's  holdings  had  been  sold,  and  the 
same  month  President  Harris  inaugurated  a  policy  of  retrenchment 
by  the  retirement  of  four  out  of  the  five  vice-presidents  which  the 
Reading  had  been  accustomed  to  maintain.  In  July  the  receivers 
obtained  permission  to  dissolve  the  agreement  with  the  Pennsyl- 
vania, Poughkeepsie  &  Boston  Railroad,  and  in  August  the  appoint- 
ment of  a  separate  receiver  for  the  Philadelphia,  Reading  & 
New  England  marked,  except  for  the  minor  matter  of  the  Pough- 
keepsie Bridge,  the  final  abandonment  of  New  England  extension. 
Meanwhile  an  arrangement  had  been  made  with  the  Lehigh  Valley, 
whereby  the  payments  under  the  lease  were  reduced  for  two  years 
from  7  per  cent  to  5  per  cent,  on  condition  that  the  Reading  should 
make  extra  payments  at  the  end  of  that  time  if  the  Lehigh  proved 
to  have  earned  more  than  10  per  cent  in  the  interval ;  and  permission 
had  been  obtained  from  the  Circuit  Court  to  surrender  the  possession 
and  operation  of  the  Eastern  &  Amboy  Railroad  and  the  Lehigh 
Valley  Terminal  Railroad,  both  lines  belonging  to  the  Lehigh 
Valley  in  the  state  of  New  Jersey.  The  Lehigh  lease,  even  as  modi- 
fied, aroused  much  opposition  from  bondholders,  who  rightly 
maintained  that  payments  under  it  constituted  a  diversion  of  funds 
which  should  have  gone  to  the  creditors  of  the  Reading  proper. 
Suit  was  begun  before  the  Circuit  Court,  and  on  August  8,  1893, 
a  formal  abrogation  was  obtained.  This  incidentally  caused  the 
resignation  of  Mr.  Wilbur,  president  of  the  Lehigh  Valley,  from 
his  position  as  receiver  of  the  Reading,  and  the  appointment  of 
Mr.  J.  Lowber  Welsh  in  his  place. 

The  more  complicated  task  of  the  bondholders  was  at  first  under- 
taken by  two  committees :  one  for  the  general  mortgage  bondholders, 
of  which  Mr.  J.  Edward  Simmons  was  chairman;  and  one  for  the 
income  bondholders,  led  by  Mr.  George  Coppell.  Three  demands 
were  at  once  made :  first,  that  Mr.  McLeod  retire  from  the  receiver- 
ship; second,  that  the  lease  of  the  Lehigh  Valley  be  abrogated; 
and  third,  that  the  books  of  the  company  be  examined  by  a  railroad 
accountant.  The  first  and  second  points  were  complied  with,  though 
not  altogether  because  of  the  insistence  of  the  committees,  and  in 
the  end  the  third  was  also  granted,  and  Mr.  Stephen  Little  was  set 
to  work.1 

1  Chron.  57: 105,  1893;  Ibid.  57:  423,  1893. 


PHILADELPHIA    &  READING  129 

On  May  27,  1893,  the  managers  of  the  company  brought  for- 
ward a  reorganization  plan,  which  estimated  the  floating  debt  at 
$19,991,941,  and  proposed  to  cover  it  by  the  issue  of  $22,000,000 
collateral  trust  bonds  at  95.  These  bonds  were  to  be  redeemable 
any  time  before  maturity  at  no,  and  the  trustee  was  authorized 
"to  apply  the  surplus  income  or  the  proceeds  of  sales  ...  of  any 
of  the  securities  pledged  until  1898,  and  thereafter  so  much  as 
might  be  determined  from  time  to  time  by  the  Railroad  Company, 
to  the  purchase  of  the  said  bonds  at  the  best  price  obtainable,  or, 
if  necessary,  to  draw  the  same  for  redemption."  General  mort- 
gage and  first,  second,  and  third  preference  bonds  were  to  be 
entitled  to  subscribe  to  the  amount  of  10  per  cent  of  their  holdings ; 
deferred  income  bonds  to  4  per  cent;  and  stockholders  to  24  per 
cent;  while  besides  the  $22,000,000  mentioned,  $2,000,000  addi- 
tional bonds  were  to  be  issued  each  year  for  working  capital  and 
for  the  acquisition  of  real  and  personal  property.  General  mortgage 
bondholders  were  to  fund  their  coupons  to  and  including  January  i, 
1898,  and  to  receive  an  equivalent  amount  of  coupon  trust  certifi- 
cates. The  rental  under  the  Lehigh  Valley  lease  was  to  be  reduced, 
and  the  Reading  stock  was  to  be  transferred  for  seven  years  to  a 
voting  trust  composed  of  Joseph  S.  Harris,  E.  P.  Wilbur,  Thomas 
McKean,  and  two  others  to  be  afterwards  named.1  Assents  of  90 
per  cent  of  the  general  mortgage  bondholders  and  of  60  per  cent 
of  the  stockholders  were  required  by  the  2ist  of  June  to  make  the 
plan  effective,  and  a  syndicate  was  pledged  to  carry  out  the  provi- 
sions if  such  assents  should  be  obtained.2 

An  issue  of  collateral  bonds,  a  reduction  in  the  Lehigh  rental, 
a  funding  of  coupons,  and  a  voting  trust :  these  were  the  propositions 
which  President  Harris  and  his  associates  presented  for  the  con- 
sideration of  the  bondholders.  There  was  to  be  no  disturbance  of 
existing  securities,  no  assessment,  not  even  a  reduction  of  fixed 
charges  except  as  these  were  lightened  by  the  lowering  of  rentals 
and  by  the  payment  of  the  floating  debt.  It  is  to  be  presumed  that 
the  attempt  to  extend  the  Reading  into  New  England  was  not  to  be 
continued,  for  no  provision  was  made  for  the  purchase  of  the  shares 
of  the  New  England  roads  hitherto  held  on  margin,  and  in  fact 
large  sales  of  Boston  &  Maine  stock  had  already  taken  place ;  but 

1  New  York  Herald,  May  29,  1893.  2  Ry.  Times,  63:  783,  1893. 


130  RAILROAD  REORGANIZATION 

no  formal  mention  of  the  deal  was  made.  The  lease  of  the  Lehigh 
Valley  was  to  be  continued  in  the  hope  of  better  times,  while  the 
reduction  of  rental  which  the  plan  required  had  already  taken 
place.  Under  ordinary  circumstances  any  plan  such  as  the  one 
outlined  would  have  been  quite  futile.  Where  the  failure  of  a  road 
is  due  to  deep-seated  causes  the  remedy  must  be  fundamental; 
and  when  a  piling  up  of  indebtedness  is  due  to  inability  to  pay 
fixed  charges  the  situation  must  be  met  by  a  reduction  of  those 
charges  even  though  a  foreclosure  sale  be  a  necessary  preliminary. 
In  the  present  case  matters  were  somewhat  different :  bankruptcy 
had  come,  not  from  a  long-continued  drain,  but  from  a  rapid  diffu- 
sion of  resources  in  an  attempt  to  accomplish  more  than  the  finances 
of  the  road  would  permit;  and  a  change  of  policy  was  the  thing 
most  urgently  required.  But  this  again  was  not  a  question  with  which 
a  reorganization  plan  had  to  deal,  except  in  so  far  as  such  a  plan 
might  smooth  the  difficulties  which  lay  in  the  way ;  and  any  scheme 
which  should  restore  to  the  company  the  collateral  imperilled  in 
its  rash  campaign,  fund  the  floating  debt  at  a  reasonable  rate  of 
interest,  and  give  the  management  a  chance  to  start  again,  was 
worthy  of  serious  consideration.  It  may  be  observed,  however, 
that  granting  all  of  the  above,  the  plan  before  us  did  not  go  far 
enough.  The  extensions  due  to  President  McLeod  had  been  in 
the  heart  of  the  coal  regions,  as  well  as  in  New  England,  and  one 
of  the  most  important  of  these,  the  Lehigh  Valley,  the  managers 
proposed  to  retain.  This  policy,  it  may  be  said,  was  of  very 
doubtful  wisdom.  The  attempt  to  monopolize  the  production  of 
anthracite  coal  had  already  been  fruitful  of  disaster,  and  the  pos- 
session of  the  Lehigh  would  have  constituted  a  continual  temptation 
to  future  purchases ;  while  it  was  far  from  certain  that  even  under 
the  reduced  rental  the  road  could  have  been  made  to  pay.  What  the 
Reading  needed  was  a  period  of  quiet  attention  to  its  own  business, 
undisturbed  by  meddling  in  the  business  of  other  people ;  an  atten- 
tion which  would  be  sure  to  result  in  increased  economies,  and 
was  the  true  remedy  for  the  lack  of  prosperity  in  the  coal  industry 
which  had  driven  Mr.  McLeod  on  his  wild  career.  It  is  to  this 
latter  judgment  that  we  must  in  the  end  conform.  The  plan  of 
President  Harris  was  not  so  inadequate  as  might  at  first  appear; 
it  accomplished  much  that  needed  to  be  accomplished,  and  it  gave 


PHILADELPHIA    &  READING  131 

an  opportunity  to  the  management  of  the  road  to  retrace  many 
of  the  steps  of  the  previous  two  years;  but  on  the  other  hand,  it 
did  not  embrace  the  chance  to  free  the  Reading  from  all  its  mistaken 
enterprises,  and  passed  by  an  occasion  which  could  only  again 
occur  after  much  suffering  and  loss. 

Discussion  turned,  however,  on  other  features.  In  a  circular 
to  securityholders  in  June,  President  Harris  said:  "My  deliberate 
opinion  is  that  the  assistance  asked  for  by  the  proposed  plan  ...  is 
none  too  great,  and  that  there  is  a  good  probability  that  if  it  is 
afforded  and  the  plan  is  carried  out  prudent  and  careful  manage- 
ment may  prevent  the  recurrence  of  such  a  crisis.  My  judgment 
is  that  the  securityholders  will  make  a  very  serious  mistake  if  they 
do  not  accept  the  relief  offered  them,  for  I  see  no  probability  that 
the  necessary  assistance  can  hereafter  be  obtained  except  upon 
much  more  onerous  terms.  I  strongly  advise  that  the  plan  shall  be 
promptly  accepted."  *  "We  cannot  but  regard  these  terms  as  very 
easy,"  said  the  Financial  Chronicle.  "To  be  sure  a  new  collateral 
trust  mortgage  for  $30,000,000,  bearing  6  per  cent,  is  to  be  cre- 
ated, but  the  greater  part  of  this  goes  to  take  up  floating  debt  and 
other  existing  obligations,  and  will  involve  no  increase  in  fixed 
charges.  .  .  . " 2  On  the  other  hand,  it  was  objected  that  the  plan  was 
formed  entirely  in  the  interest  of  the  floating  debt  holders,  income 
bondholders,  and  stockholders ;  and  that  the  management  under 
the  arrangement  would  have  the  power  to  pay  dividends  upon  the 
income  bonds,  while  at  the  same  time  the  coupons  on  the  4  per  cent 
mortgage  bonds  were  being  funded.3  In  an  editorial  urging  fore- 
closure proceedings  the  London  Standard  said:  "That  [foreclosure] 
will  prevent  holders  of  pledged  collaterals  from  getting  a  market 
for  their  securities,  and,  at  the  same  time,  bring  a  good  many  doubt- 
ful matters  connected  with  the  finances  of  the  company  into  the 
light  of  day.  It  should  also  tend  to  make  the  '  floating  debt '  swindle 
less  popular  with  eminent  American  financiers.  At  present  they 
pile  these  debts  up  in  the  full  assurance  that  they  can  easily  arrange 
matters  so  as  to  put  them,  when  funded,  before  existing  mortgages. 
It  is  for  the  Reading  general  mortgage  bondholders  to  act  promptly 
for  their  own  interests."  4  Finally,  it  was  objected  that  the  plan 

1  Ry.  Age,  18:501,  1893.  *  Chron.  56:905,  1893. 

3  Ry.  Times,  63:  751,  1893.  *  Ry.  Times,  63:  783,  1893. 


132  RAILROAD  REORGANIZATION 

was  in  the  interest  of  the  McLeod  management,  and  that  the  voting 
trust  was  to  be  a  McLeod  organization,  which  would  either  white- 
wash the  ex-president's  operations,  or  by  keeping  them  in  the 
background  would  virtually  outlaw  them. 

The  plan  failed  because  the  time  allowed  for  deposits  was  too 
short.  In  spite  of  the  objections  raised  31,356  general  mortgage 
bonds  and  411,218  shares  of  stock  were  deposited  in  twenty-five 
days,  and  it  was  maintained  that  additional  securities  would  surely 
be  obtained  to  make  up  the  percentages  required.  The  managers 
alleged,  however,  that  extension  was  impracticable,  and  announced 
that  the  scheme  could  not  go  through.1 

The  year  following  this  attempt  at  rehabilitation  was  full  of  the 
struggles  of  different  interests,  each  jealous  of  any  concession  and 
working  devotedly  for  its  own  hand.  Prominent  at  this  time  was 
Mr.  I.  L.  Rice,  the  same  gentleman  who  has  before  been  quoted 
in  connection  with  Mr.  McLeod's  operations  in  New  England 
stocks.  Mr.  Rice  had  been  a  member  of  the  syndicate  which  had 
put  Mr.  McLeod  into  the  presidency,  and  had  served  as  foreign 
representative  of  the  company  during  his  regime.  He  had  been 
instrumental  in  forming  the  anthracite  coal  combination,  and  at 
the  time  of  the  Reading  failure  had  been  in  England  raising  money 
to  finance  the  coal  holdings  then  acquired.2  Returning  from  Europe 
upon  the  appointment  of  receivers,  he  examined  the  Reading  books 
with  the  results  which  have  been  noticed,  and  now  appeared  as  the 
active  enemy  of  everything  connected  with  Mr.  McLeod,  even  to 
the  receivers  who  had  succeeded  him.  In  May,  1893,  he  resigned  the 
seat  which  he  had  held  on  the  Reading  board,  on  the  ground  that 
the  management  had  condoned  the  use  by  Mr.  McLeod  of  the  com- 
pany's securities  in  carrying  on  his  private  and  personal  specula- 
tions; in  September  he  resigned  from  the  income  bondholders' 
committee,  and  attacked  in  a  circular  the  McLeod  regime  and 
the  succeeding  receivership ; 3  and  in  December  he  applied  for  the 
removal  of  the  receivers,  alleging  that  they  had  grossly  neglected 
their  duties  to  the  stockholders,  and  had  ignored  the  financial  trans- 
actions of  Mr.  McLeod  prior  to  their  appointment.4 

1  R.  R.  Gaz.  25:  496,  1893.     The  deposits   required    were:  general  mortgage, 
$41,828,000;  stock,  480,424  shares. 

2  Industrial  Commission,  vol.  9,  p.  737,  testimony  of  I.  L.  Rice. 

3  Ry.  Times,  64:  369,  1893.  4  Ry.  Age,  18:  897,  1893. 


PHILADELPHIA    &  READING  133 

In  spite  of  his  hostility  to  the  existing  regime,  Mr.  Rice  hoped 
to  rehabilitate  the  company  without  foreclosure  or,  indeed,  formal 
reorganization.  The  action  of  others  was  inspired  by  a  less  opti- 
mistic view.  The  original  suit  on  which  receivers  had  been  appointed 
had  been  brought  by  one  Thomas  C.  Platt ;  but  as  early  as  March 
Alfred  Sully  and  A.  B.  Rand  of  New  York,  and  John  Lowrie  of 
London,  holders  of  first  and  second  preference  income  bonds, 
petitioned  to  intervene.  In  July  Judge  Dallas  dismissed  the  Lowrie 
suit,  but  the  petition  was  renewed  in  September,  alleging  that  Mr. 
Platt  "did  not  file  his  bill  in  good  faith  on  his  own  behalf,  and  on 
behalf  of  all  other  holders  of  bonds,  but  at  the  request  and  for  the 
benefit  and  protection  of  the  men  who  were  then  managers  of  the 
Philadelphia  &  Reading  Railroad  Company  and  the  Philadelphia 
&  Reading  Coal  &  Iron  Company,  and  that  the  suit  was  not  being 
pressed  with  due  diligence."  l 

All  this  time  the  receivers  had  been  busy  on  a  plan,  which  they 
presented  in  January,  1894.  By  leaving  out  of  consideration  some 
$5,000,000  of  car  trusts  they  arrived  at  the  figure  of  $12,500,000 
for  the  floating  debt.  This  they  proposed  to  cover  by  the  issue  of 
$6,000,000  in  6  per  cent  ten-year  trust  certificates,  based  on  the 
stock  of  coal  on  hand,  and  by  $10,000,000  in  5  per  cent  collateral 
trust  bonds  then  in  the  treasury  of  the  Reading  Company.  They 
hoped  that  a  balance  of  $2,500,000  would  then  remain  available 
for  working  capital  or  other  purposes.  General  mortgage  coupons 
were  to  be  funded  for  five  years,  although  the  receivers  planned 
to  have  a  syndicate  formed  to  purchase  at  par  for  cash  the  coupons 
as  they  matured,  giving  to  the  bondholders  in  each  case  the  choice 
between  receiving  money  or  coupon  trust  certificates  for  the  interest 
due.  There  was  to  be  no  formal  reorganization,  no  cuts  in  charges, 
nothing  but  a  provision  for  the  floating  debt  and  for  a  temporary 
funding  of  interest  payments ;  and  this  was  the  more  feasible  because 
the  Lehigh  Valley  lease  had  been  by  this  time  abrogated  and  the 
New  England  extensions  definitely  abandoned.2  It  will  be  remem- 
bered that  to  the  plan  of  May,  1893,  it  had  been  objected  that  the 
provisions  contrived  to  bring  in  the  floating  debt  ahead  of  previ- 
ously existing  liens,  and  were  a  premium  on  a  kind  of  financial  jug- 
gling too  common  among  American  railroads.  This  plan,  therefore, 

1  Ry.  Age,  18:  735,  1893.        »  Ry.  Rev.  34:  55,  1894;  Ry.  Times,  65:87,  1894. 


134  RAILROAD  REORGANIZATION 

avoided  a  new  issue  of  bonds,  and  used  only  what  the  treasury 
already  possessed.  The  coal  notes  were  obviously  unobjectionable, 
and  served  at  the  same  time  to  utilize  the  unsalable  stock  which  the 
management  had  earlier  accumulated.  If  their  value  should  prove 
small  the  loss  would  fall  on  the  holders  of  the  floating  debt  and  not 
on  the  owners  of  the  general  mortgage  bonds;  while  the  return  to 
the  company  was  assured  by  arrangement  with  Drexel  &  Co., 
Brown  Bros.  &  Co.,  and  J.  Lowber  Welsh  on  the  one  hand,  and 
the  Finance  Company  of  Pennsylvania  on  the  other.  On  the 
whole  this  plan  was  gentle  even  to  tenderness  with  the  creditors  of 
the  road,  and  its  failure  revealed  clearly  the  bondholders'  state 
of  mind.  The  holders  of  the  general  mortgage  refused  to  fund 
their  coupons  for  five  years,  they  refused  to  fund  them  for  two 
years,  and  they  insisted  that  foreclosure  proceedings  should  be 
instituted  unless  they  should  receive  immediate  payment  of  their 
interest.  "In  view  of  this,"  the  receivers  were  forced  to  remark, 
"it  would  be  idle  for  [us]  to  continue  the  efforts  to  readjust  the 
affairs  of  the  company.  .  .  ."  *  The  trouble  with  the  receivers' 
scheme  was  not  that  it  demanded  large  concessions,  —  much  larger 
had  been  asked  and  granted  in  1887,  — but  that  the  general  mort- 
gage bondholders  felt  that  on  the  one  hand  the  road  was  very 
nearly  earning  fixed  charges,  so  that  in  the  contingency  of  a  fore- 
closure sale  their  interests  would  be  reasonably  safe;  and  on  the 
other  that  a  demand  for  concessions  so  soon  after  a  complete  reor- 
ganization of  the  property  was  an  irritant  which  might  well  be 
resented  even  at  the  risk  of  some  pecuniary  loss.  Fortunately  the 
assent  of  the  bondholders  was  not  necessary  to  the  issue  of  the  coal 
trust  notes,  and  the  receivers  executed  them  under  the  authority 
of  the  court,  practically  as  proposed. 

In  April,  1894,  Mr.  Simmons,  chairman  of  the  old  general  mort- 
gage bondholders'  committee,  resigned  his  position,  and  Mr.  Fitz- 
gerald, president  of  the  Mercantile  Trust  Company,  was  chosen  to 
succeed  him.  The  committee  presently  issued  a  notice  which,  after 
reviewing  its  early  activity,  went  on  to  say  that  it  had  believed  it 
prudent  to  give  the  receivers  every  opportunity  to  familiarize  them- 
selves with  the  affairs  of  the  company,  but  that  in  its  judgment 
the  time  had  come  for  action  to  enforce  the  rights  of  the  bondholders 

1  Chron.  58:  774,  1894. 


PHILADELPHIA    &  READING  135 

under  the  mortgage.1  In  May,  1894,  a  new  general  mortgage  com- 
mittee was  organized,  with  Mr.  F.  P.  Olcott  as  chairman,  designed 
not  directly  to  oppose  the  Fitzgerald  Committee,  but  to  hasten  the  re- 
habilitation of  the  property.  The  committee  prepared  a  bondholders' 
agreement  calling  for  the  deposit  of  general  mortgage  bonds,  and 
in  a  statement  of  their  position  said:  "Difficulties  in  the  way  of 
a  foreclosure  and  reorganization  thereafter  are  exaggerated ;  if  any 
danger  is  wrought  by  such  foreclosure  it  will  fall  upon  the  junior 
securities  and  not  upon  us."  2  Lastly,  at  this  time,  there  was  a  com- 
mittee headed  by  Mr.  Earle,  president  of  the  Finance  Company  of 
Pennsylvania. 

The  first  matured  suggestion  after  the  failure  of  the  receivers' 
plan  appeared  in  what  was  known  as  the  Olcott-Earle  Agreement, 
published  on  September  25,  1894,  which  seems  to  have  been  in  many 
respects  a  revival  of  that  scheme.  It  proposed  to  cover  the  floating 
debt  by  the  sale  to  securityholders  of  $10,000,000  collateral  trust 
bonds,  heretofore  held  in  the  treasury,  and  to  fund  coupons  on  the 
general  mortgage  45  for  five  years.  A  syndicate  agreed  to  advance 
$9,000,000,  or  as  much  thereof  as  might  be  needed,  to  buy  the  coupons 
as  they  should  mature.  The  stock  was  to  be  held  and  voted  by  the 
reorganization  committee  until  all  the  money  advanced  by  the  syn- 
dicate should  have  been  repaid;  that  is,  till  June,  1898;  a  second 
syndicate  guaranteed  the  sale  of  the  collateral  bonds  at  70 ;  and  the 
preferred  bondholders  were  asked  to  forego  any  claims  for  interest 
until  all  the  general  mortgage  coupons  should  have  been  retired  and 
cancelled.  Certain  other  details  are  of  interest.  The  collateral  bond 
issue  was  to  be  taken  up  by  the  preferred  bondholders  and  stock- 
holders, each  individual  subscribing  to  10  per  cent  of  the  par  value 
of  his  holdings ;  but  the  bondholder  might,  if  he  preferred,  pay  3  per 
cent  of  the  par  value  of  the  securities  he  owned  and  receive  nothing, 
instead  of  paying  10  per  cent  and  getting  a  collateral  bond.  Se- 
curityholders were  given  60  days  in  which  to  assent,  and  if  at  the 
end  of  that  time  the  number  of  assents  did  not  amount  to  practically 
all  the  interests  involved,  the  committee  proposed  to  reorganize  by 
foreclosure  for  the  benefit  only  of  those  who  had  assented  to  the 

1  Ry.  Times,  65 :  623,  1894.    See  also  the  report  of  the  company's  comptroller  to 
the  receivers  in  Annual  Report,  1893. 
J  Ry.  Rev.  34:307*  l894- 


136  RAILROAD  REORGANIZATION 

plan ;  while  for  the  future  the  committee  was  to  provide  by  agree- 
ment with  the  railroad  company  that  the  latter  should  call  an  annual 
meeting  of  general  and  income  mortgage  bondholders  and  stock- 
holders, at  which  bondholders  as  well  as  stockholders  should  vote 
in  proportion  to  the  par  value  of  their  holdings.1 

It  will  be  observed  that  the  source  of  relief  sought  by  this  plan 
was  precisely  that  of  the  receivers'  plan  earlier  described.  Certain 
changes,  however,  of  considerable  importance  were  introduced. 
The  subscriptions  to  the  collateral  issue  were  made  distinctly  ob- 
ligatory, and  an  alternate  assessment  was  provided;  greater  use 
was  made  of  syndicate  assistance ;  some  voting  power  was  given  to 
the  bonds ;  and  a  voting  trust  was  added  to  ensure  permanency  of 
control  to  the  designers  of  the  reorganization  till  their  work  should 
be  complete.  On  the  whole  there  were  still  few  concessions  to 
creditors,  and  indeed  could  be  few.  Ten  coupons  of  the  general 
mortgage  were  to  be  funded,  though  it  was  made  easy  for  the  bond- 
holder to  get  cash  if  he  preferred  it;  the  provisions  concerning 
subscriptions  to  the  collateral  bonds  were  rather  more  burdensome 
than  before ;  and  the  voting  trust,  while  redounding  to  the  ultimate 
advantage  of  creditors,  was  only  indirectly  a  concession  to  their 
demands.  The  grant  of  voting  power  to  the  bondholders  would  have 
been  a  great  concession,  but  the  wording  of  the  clause  was  vague 
and  probably  little  practical  effect  would  have  ensued.  As  in  the 
previous  plans,  no  particular  attention  was  paid  to  the  reduction  of 
fixed~  charges. 

So  much  for  the  provisions  of  the  plan.  It  was  a  hopeful  innova- 
tion for  the  suggestions  it  contained  to  come  from  holders  of  general 
mortgage  bonds,  and  seemed  to  give  some  evidence  of  a  change  of 
heart ;  especially  since  the  Olcott  Committee  did  secure  the  assent 
of  a  larger  proportion  of  the  issue  than  had  accepted  either  of  the 
propositions  before  brought  forward.  The  Fitzgerald  Committee 
strenuously  protested,  still  insisting  on  the  advisability  of  fore- 
closure ;  and  further  objections  came  from  Mr.  Rice  and  from  the 
Hartshorne  Committee.  Nevertheless,  the  general  mortgage  as  a 
whole  gave  its  consent,  and  ultimate  shipwreck  was  due  only  to  the 

1  Chron.  59:515,  1894;  Ry.  Age,  19:557,  1894;  Ry.  Rev.  34:56l»  l894J  Ry- 
Times,  66:  571,  1894. 


PHILADELPHIA    &  READING  137 

abstention  of  the  income  mortgage  bonds.1  It  is  not  surprising  that 
the  income  bondholders  should  have  felt  that  the  plan  had  little  in 
it  for  them.  They  had  been  given  no  voice  in  its  making,  —  their 
wishes  had  at  no  time  been  regarded.  During  the  whole  reorgan- 
ization the  question  had  been  of  the  terms  to  which  the  general 
mortgage  bondholders  would  consent,  and  the  only  sign  of  the  exist- 
ence of  junior  liens  had  been  an  occasional  fearful  inquiry  as  to 
what  would  become  of  them  under  foreclosure ;  until  now  the  com- 
bination of  a  voting  trust  with  the  expenses  of  a  syndicate  reorgan- 
ization, and  an  assessment  upon  them  and  upon  the  stock,  touched 
the  limit  which  they  would  stand.  There  was,  moreover,  at  this 
time  no  question  of  the  wiping  out  of  the  value  of  their  holdings. 
The  preamble  to  the  Olcott-Earle  plan  stated  that  the  annual  charges 
were  $10,477,560  and  that  the  net  earnings  for  1891  had  been 
$10,977,398;  thus  showing  that  something  was  left  for  the  junior 
securities  even  after  the  payment  of  interest  on  all  prior  and  general 
mortgage  liens.  It  seemed  also  barely  possible  that  the  difficulties 
of  a  foreclosure,  with  the  danger  under  the  laws  of  Pennsylvania  of 
losing  the  coal  properties  of  the  company,  might  secure  better  terms 
for  the  holders  of  junior  obligations  in  case  they  should  withhold 
their  assent. 

Early  in  January,  1895,  the  following  official  notice  was  issued : 
"The  plan  of  readjustment,  dated  October  i,  1894,  has  not  been 
assented  to  by  a  sufficient  number  of  income  bondholders  and  stock- 
holders to  make  the  same  effective.  The  committee  now  hold  over 
a  majority  of  the  general  mortgage  bonds,  and  have,  in  accordance 
with  the  bondholders'  agreement  of  May  7,  1894,  and  their  circular 
of  October  i,  1894,  notified  the  trustees  of  the  general  mortgage  to 
bring  suit  for  the  foreclosure  thereof  ...  as  expeditiously  as  pos- 
sible." 2  Suit  for  foreclosure  was  brought  March  2  in  accordance 
with  the  announcement,  and  the  Junior  Securities  Protective  Com- 
mittee, an  organization  with  purposes  indicated  by  its  name,  was 
allowed  to  intervene. 

1  Deposits  of  bonds  were  up  to  the  last  of  January  (R.  R.  Gaz.  27:  78,  1895): 

Total  Issue  Deposits 

General  Mortgage                            $44,663,000  $33,009,000 

ist  preferred                                          23,948,133  12,182,300 

2d  preferred                                         16,176,326  6,261,600 

3d  preferred                                         18,591,099  8,631,400 

2  Chron.  60:  43,  1895. 


138  RAILROAD  REORGANIZATION 

Meanwhile  the  Fitzgerald  and  Olcott  committees  together  pre- 
pared and  brought  forward  the  final  reorganization  scheme.  The 
conditions  now  differed  from  those  with  which  any  previous  plan 
had  been  confronted,  in  that  it  was  no  longer  necessary  to  seek  for 
as  little  change  as  possible,  and  a  broader,  more  radical  reorgan- 
ization was  in  point.  "Unless,"  began  the  scheme,  "the  managers 
shall  decide  to  proceed  without  foreclosure  or  sale,  the  properties 
of  the  existing  Reading  companies  will  be  sold  and  successor  com- 
panies will  be  organized  under  the  laws  of  Pennsylvania,  and  the 
stock  and  securities  of  these  successor  companies  will  be  vested  in 
a  new  company  formed,  or  to  be  formed,  under  the  laws  of  Penn- 
sylvania or  of  some  other  state." 

There  were  to  be  issued : 

General  mortgage  loo-year  4  per  cent  gold  bonds,  $114,000,000 
Non -cumulative,  4  per  cent  first  preferred  stock  (subject  to  an 

increase  of  $21,000,000),  28,000,000 

Non-cumulative  4  per  cent  second  preferred  stock,  42,000,000 

Common  stock  (subject  to  an  increase  of  $21,000,000),  70,000,000 

If  at  any  time  dividends  of  4  per  cent  should  have  been  paid  on 
the  first  preferred  stock  for  two  successive  years  the  company 
might  convert  the  second  preferred  stock  at  par,  one-half  into  first 
preferred  and  one-half  into  common  stock.  These  new  issues  were 
ultimately  to  retire  all  outstanding  securities,  to  provide  for  expenses 
of  reorganization,  and  to  go  for  new  construction,  additions,  better- 
ments, etc.,  in  the  succeeding  years.  Since,  however,  it  was  ob- 
viously impossible  to  cancel  prior  liens  before  maturity,  sufficient 
general  mortgage  bonds  ($44,550,000)  were  reserved  from  immediate 
issue  to  retire  these  when  they  should  fall  due.  This  left  new  gen- 
eral mortgage  bonds  with  four  classes  of  stock  against  old  general 
mortgage  bonds  with  three  classes  of  preferred  bonds,  common 
stock,  and  deferred  incomes ;  and,  as  might  be  expected,  new  general 
mortgage  45  were  given  for  the  old  general  mortgage,  second  pre- 
ferred and  common  stock  went  for  preference  bonds,  and  new 
common  stock  for  old  common  stock  and  deferred  income  bonds. 
Certain  cash  payments  were  made  on  the  general  mortgage,  and 
$4,000,000  of  the  new  issue  were  sold  to  a  syndicate ;  but  on  the 
whole  we  may  say  that  the  prior  liens  and  general  mortgage  bond- 
holders occupied  the  same  position  in  the  new  company  which  they 


PHILADELPHIA    6*  READING  139 

had  occupied  in  the  old ;  that  the  income  bondholders  exchanged 
a  bond  with  a  lien  on  income  for  a  stock  with  a  right  to  dividends; 
and  that  the  floating  debt,  syndicate,  and  other  expenses  were  given 
equal  rights  with  the  general  mortgage. 

No  additional  mortgage  was  to  be  put  upon  the  property,  nor 
was  the  amount  of  the  first  preferred  stock  to  be  increased,  except 
with  the  consent,  in  each  instance,  of  the  holders  of  a  majority  of 
the  whole  amount  of  each  class  of  preferred  stock,  given  at  a  meeting 
of  the  stockholders  called  for  that  purpose,  and  with  the  consent  of 
the  holders  of  a  majority  of  such  part  of  the  common  stock  as 
should  be  represented  at  such  meeting,  the  holders  of  each  class  of 
stock  voting  separately;  neither  was  the  amount  of  the  second 
preferred  stock  to  be  increased,  except  in  a  similar  way.  These 
careful  clauses  made  some  provision  for  future  capital  requirements 
necessary  which  should  be  independent  of  the  consent  of  the  stock- 
holders at  any  time ;  and  $20,000,000  general  mortgage  bonds  were 
accordingly  set  aside,  to  be  issued  in  amounts  not  greater  than 
$1,500,000  in  any  one  year  for  future  construction,  equipment,  and 
the  like.  Additional  general  mortgage  bonds  were  provided  to  retire 
Philadelphia  &  Reading  Terminal  and  Coal  &  Iron  Company 
bonds  up  to  the  sum  of  $21,000,000. 

The  floating  debt,  estimated  at  $25,150,000,  was  provided  for 
in  part  by  assessment,  and  in  part  by  the  sale  of  securities  to  the 
syndicate  for  cash;  20  per  cent  being  levied  on  first,  second,  and 
third  preference  income  bonds,  20  per  cent  on  the  stock,  and  4  per 
cent  on  the  deferred  incomes;  while  the  syndicate  agreed  to  take 
$4,000,000  of  the  new  general  mortgage  bonds  and  $8,000,000  of 
the  new  first  preferred  stock.  The  assessment  was  expected  to  yield 
$20,862,289,  and  the  syndicate  to  contribute  in  cash  $7,300,000; 
leaving  an  estimated  cash  balance  of  $3,000,000.  In  addition,  the 
syndicate  (Messrs.  J.  P.  Morgan  &  Co.,  J.  Kennedy  Tod  &  Co., 
Hallgarten  &  Co.,  and  A.  Iselin  &  Co.)  undertook  to  underwrite 
the  payment  of  the  assessments  on  the  income  bonds  and  stock, 
and  to  guarantee  the  extension  or  payment  of  the  improvement 
mortgage  and  Coal  &  Iron  Company  bonds,  most  of  which  were  to 
mature  in  the  following  two  years.  No  great  reduction  of  fixed 
charges  was  of  course  to  be  expected.  The  cancellation  of  the 
floating  debt  effected,  nevertheless,  a  certain  saving,  so  that  charges 


140  RAILROAD  REORGANIZATION 

for  the  future  were  estimated  at  $9,300,000  as  against  net  earnings  of 
$9,839,971  in  1894;  while  the  refunding  or  extension  of  maturing 
bonds  was  looked  to  for  a  reduction  of  $500,000. l 

It  is  plain  that  this  plan  favored  the  general  mortgage  bond- 
holders to  the  last  degree,  and  admitted  them  to  the  reorganized 
company  with  absolutely  no  sacrifice  save  that  of  the  addition  of 
$4,000,000  to  the  total  general  mortgage  issue.  They  funded  no 
coupons,  they  suffered  no  diminution  of  interest  and  no  shaving 
of  principal ;  they  paid  no  assessment ;  and  as  an  additional  pro- 
tection to  them,  the  provision  was  inserted  that  all  classes  of  stock 
of  the  new  company,  except  such  number  as  might  be  disposed  of 
to  qualify  directors,  were  to  be  voted  by  three  voting  trustees,  of 
whom  J.  P.  Morgan  and  F.  P.  Olcott  were  designated  hi  the  plan. 
It  has  seldom  happened  hi  any  reorganization  that  a  mortgage 
similar  to  the  general  mortgage  in  this  case  has  been  able  to  take 
and  hold  so  strong  a  position.2  The  secret  lay  in  the  fact  that  the  road 
had  been  earning  the  interest  on  the  general  mortgage  bonds;  and 
that  under  these  circumstances  no  interest  or  combination  of  in- 
terests could  force  the  holders  to  accept  less  than  payment  hi  full 
of  all  their  claims.  The  situation  could  never  have  arisen  in  the 
earlier  reorganization;  it  could  never  have  occurred  where  a  re- 
duction in  annual  payments  was  required  for  the  salvation  of  the 
property,  or  even  where  the  amount  of  cash  to  be  raised  to  pay  the 
floating  debt  was  so  large  that  junior  securityholders  would  have 
relinquished  their  holdings  rather  than  pay  the  necessary  assess- 
ments. In  this  case  none  of  these  conditions  existed,  and  all  the 
burden  was  thrown  on  the  holders  of  junior  mortgages  and  stock. 
It  must  be  remembered,  also,  that  though  in  ordinary  cases  the 
difference  between  the  income  bonds  which  the  old  first  and  second 
preference  bondholders  surrendered  and  the  preferred  stock  which 
they  received  would  not  have  been  very  great,  yet  here  the  pro- 
visions of  the  old  income  mortgage,  which  forbade  the  deduction 
from  net  earnings  of  any  interest  on  bonds  subsequently  created  until 
its  interest  should  have  been  paid,  rendered  the  loss  more  serious. 

To  sum  up,  the  holders  of  junior  securities  and  stock  paid  the 
expenses  of  reorganization,  paid  the  floating  debt,  lost  what  right 
they  had  to  interest  before  the  settlement  of  interest  on  subsequently 

1  Ry.  Times,  68:  802,  1895;  Chron.  61 :  1109,  1895.    2  Ry.  Age,  20:  625,  1895. 


PHILADELPHIA    &  READING  141 

created  claims,  and  got  only  stock,  and  for  the  most  part  second 
preferred  or  common  stock  at  that.  The  general  mortgage  bond- 
holders got  new  4  per  cent  bonds,  plus  12  per  cent,  or  2  per  cent  in 
cash,  had  no  greater  interest  charges  ahead  of  them,  and  without 
paying  any  assessment  or  making  any  concession,  except  to  allow 
the  immediate  increase  of  the  amount  of  their  issue  by  $4,000,0x30, 
and  thereafter  by  $1,500,000  per  year,  secured  a  lien  on  the  assets 
of  the  company;  a  privilege  which  was,  moreover,  extended  to  un- 
deposited  as  well  as  to  deposited  bonds.  The  company  itself  was 
dissolved,  but  the  new  corporation  which  took  over  its  assets  en- 
joyed, with  slightly  decreased  charges,  freedom  from  the  old  float- 
ing debt  and  from  the  extensions  and  combinations  which  had 
caused  the  floating  debt  of  the  old  management,  and  seemed  besides 
a  strong  financial  backing. 

In  May,  1896,  Judge  Atchison  of  Philadelphia  signed  the  decree 
for  the  foreclosure  and  sale  of  the  property  of  both  the  Railroad 
and  the  Coal  &  Iron  Companies,  and  on  September  23  the  sale 
took  place,  C.  H.  Coster,  of  J.  P.  Morgan  &  Co.,  and  Francis 
Lynde  Stetson  paying  an  aggregate  of  $20,500,000  for  the  whole 
estate.1  The  sale  ended  the  life  of  the  old  Reading  charter;  and  in 
view  of  the  constitution  adopted  for  the  state  of  Pennsylvania  in 
1871,  which  forbade  any  railroad  owning  more  than  30,000  acres 
of  coal  land,  some  device  had  to  be  sought  whereby  the  Philadelphia 
&  Reading  Railroad  and  the  Philadelphia  &  Reading  Coal  &  Iron 
Companies  could  hold  together.  Diligent  search  revealed  the  exist- 
ence of  the  "National  Company,"  a  corporation  chartered  in  1871 
by  special  act  of  the  legislature  of  Pennsylvania  at  the  very  time 
when  the  new  constitution  was  under  consideration.  This  company, 
originally  the  Excelsior  Enterprise  Company,  had  power  "to  pur- 
chase, improve,  use,  and  dispose  of  property  to  contractors  and  others 
and  for  other  purposes,"  with  privileges  fully  as  broad,  it  was  said, 
as  those  enjoyed  by  the  Reading  before  foreclosure.2  The  National 
Company  now  changed  its  name  to  the  Reading  Company,  called 
a  special  meeting,  increased  its  stock  to  the  amount  required  by 
the  plan  of  reorganization,  and,  jointly  with  the  Coal  &  Iron  Com- 
pany, authorized  a  mortgage  to  secure  bonds  up  to  a  possible  amount 
of  $135,000,000;  to  be  secured  on  the  property  of  both  companies, 

1  Chron.  63:  560,  1896.  2  Chron.  64:84,  1897. 


142  RAILROAD  REORGANIZATION 

including  the  stock  and  bonds  of  the  Railway  Company.  Mean- 
while the  Philadelphia  &  Reading  Railway  Company  had  been 
organized  to  succeed  to  the  property  and  franchises  of  the  old  Phil- 
adelphia &  Reading  Railroad  Company,1  with  a  capital  stock  of 
$20,000,000  in  $50  shares.  The  charter  of  the  Coal  &  Iron  Com- 
pany was  preserved  in  spite  of  the  foreclosure  sale.2  The  next  step 
was  for  the  Reading  Company  to  exchange  its  bonds  and  stock  for 
the  general  mortgage  bonds  and  stock  of  the  two  minor  companies 
in  the  proportions  already  agreed  upon,  and  to  deposit  the  securities 
so  obtained  in  its  treasury ;  leaving  the  prior  liens  the  only  direct  ob- 
ligations of  either  company  in  the  hands  of  the  public.  This  meant, 
of  course,  absolute  control  of  both  companies  by  the  Reading  Com- 
pany ;  and  in  the  future,  when  the  prior  liens  should  mature,  it  was 
to  mean  the  replacement  of  all  outstanding  obligations  by  the  ob- 
ligations of  the  holding  company.  Both  the  Railway  and  the  Coal  & 
Iron  Companies  retained  their  separate  organizations ;  the  belief  was 
that  there  was  no  merger  which  might  be  attacked  before  the  courts ; 
that  it  only  happened  that  one  corporate  individual  had  invested  in 
both  Railroad  and  Coal  Company  shares  and  proposed  to  vote  this 
stock,  as  was  lawful,  to  further  the  policies  of  which  it  approved.3 

1  Chron.  63 :  923,  1896. 

2  See  testimony  of  Mr.  Baer  before  the  Interstate  Commerce  Commission,  1904, 
"  Synopsis  of  Stenographers'  Minutes,  etc.,  in  the  case  of  W.  R.  Hearst  against  the 
Philadelphia  &  Reading  Railway  Company,"  p.  55.   The  managers  wished  to  take  no 
chances. 

3  Organization  and  scope  of  the  three  Reading  Companies.    The  Reading  Com- 
pany owns  practically  the  whole  of  the  capital  stock  of  the  Philadelphia  &  Reading 
Railway  Company  and  the  Philadelphia   &  Reading  Coal   &  Iron  Company,  and 
all  of  the  other  stocks  and  securities  which  were  acquired  by  the  purchases  under 
the  sale  made  by  the  Trustees  and  the  Receivers.    It  also  owns  the  $20,000,000 
purchase  money  mortgage  bonds  issued  by  the  Philadelphia   &  Reading  Railway 
Company,  the  locomotives,  cars,  steam  collieries,  tugs,  and  barges  constituting  the 
railway  and  marine  equipment,  and  all  the  real  estate  of  the  old   Philadelphia  & 
Reading  Railroad  Company  which  was  not  appurtenant  to  the  railroad  itself.  This, 
of  course,  does  not  include  the  depots,  rights  of  way,  etc.,    which  belong  to  the 
Railway  Company.    The  Philadelphia  &  Reading  Railway  Company  owns  all  the 
roads  formerly  belonging  to  the  Philadelphia  &  Reading  Railroad  Company,  and 
it  controls  the  roads  hitherto  leased  to  that  company,  either  by  transfer  of  the  old 
leases  or  by  new  leases  made  since  November  30,  1896.    It  leases  from  the  Reading 
Company  the  railway  and  marine  equipment  which  it  uses  in  the  conduct  of  its 
business  and  a  number  of  wharves  and  warehouses  on  the  Delaware  River.  Annual 
Report,  1898. 


PHILADELPHIA    e*  READING  143 

Representatives  of  the  reorganization  managers  laid  an  elaborate 
defence  of  the  legality  of  these  operations  before  Attorney- General 
McCormick  of  Pennsylvania,  and  on  January  2  secured  an  opinion 
confirming  the  validity  of  the  charter  of  the  Reading  Company. 
"After  due  consideration,"  said  Mr.  McCormick,  "I  reach  the 
conclusion,  most  reluctantly,  that  the  Commonwealth  of  Pennsyl- 
vania cannot  now  successfully  attack  the  chartered  rights  of  the 
Reading  Company.  .  .  .  My  view  of  the  whole  matter  is  that  the 
charter  of  the  company  authorized  it  to  do  the  kind  of  business  in 
which  it  engaged  prior  to  January  i,  1874,  which  business  was  of  the 
same  general  character  as  that  in  which  it  proposes  to  engage  for 
the  purpose  of  controlling  the  stocks  of  the  Railway  Company  and 
the  Coal  &  Iron  Company."  1 

Like  the  Baltimore  &  Ohio  and  the  Erie,  the  Reading  has  bene- 
fited largely  from  the  favorable  business  conditions  of  the  last 
decade.  The  combined  income  of  the  three  Reading  companies  has 
grown  from  $48,422,971  in  1898  to  $95,715,088  in  I9O7.2  Earnings 
on  the  Philadelphia  &  Reading  Railway  alone  are  now  nearly  as 
great  as  the  combined  income  of  the  three  companies  at  the  earlier 
date.  Net  receipts  were  $13,586,710  in  1898  and  $29,190,316  in 
1907;  and  the  surplus  over  all  payments  rose  from  $1,376,420  to 
$8,741,454  between  those  years.  It  is  important  to  notice  that  this 
showing  does  not  depend  primarily  upon  the  anthracite  business. 
Not  only  has  the  carriage  of  general  merchandise  increased  until 
it  affords  to  the  railway  a  return  almost  equal  to  the  earnings  on  coal, 
but  in  the  coal  business  itself  bituminous  has  assumed  an  import- 
ance nearly  as  great  as  that  of  its  harder  rival.  The  Coal  &  Iron 
Company  still  concerns  itself  almost  entirely  with  anthracite,  and 
has  accordingly  been  more  affected  by  special  causes.  The  strike 
of  the  miners  in  September  and  October,  1900,  and  again  from  May 
to  October,  1902,  checked  the  growth  in  production  for  a  time;  but 
the  increased  demand  for  domestic  consumption  has  made  possible 
an  increase  in  output  from  4,849,002  tons  in  1897  to  10,034,713 
in  1907.  Increasing  business  has  stimulated  improvements.  Over 
$15,300,000  have  been  withdrawn  from  income  by  the  Philadelphia 

1  Chron.  64:84,  1897. 

2  There  are  certain  duplications  in  both  of  these  figures,  but  the  same  duplications 
appear  in  each. 


144  RAILROAD  REORGANIZATION 

&  Reading  Railway  Company  for  this  purpose  between  1896  and 
1907;  and  over  $10,000,000  have  been  invested  from  earnings  by 
the  Coal  &  Iron  Company  during  the  same  time  in  colliery  im- 
provements alone.  Maintenance  charges  have  been  ample.  Whereas 
$1300  to  $1500  per  mile  of  single  main  track  are  sufficient  for  normal 
repairs  upon  a  trunk  line,  the  Philadelphia  &  Reading  Railway  has 
spent  over  $2600  per  mile  of  line  for  the  last  seven  years,  and  over 
$1700  for  the  three  years  preceding.  As  much  as  $73  has  been  spent 
in  a  single  year  for  average  maintenance  per  freight  car,  $609  in 
maintenance  per  passenger  car,  and  $3244  in  maintenance  per  loco- 
motive. In  consequence  of  these  repairs  and  of  renewals  upon  a 
considerable  scale,  the  average  value  of  all  locomotives  has  increased 
between  December  i,  1896,  and  June  30, 1906,  from  $4906  to  $8393 ; 
the  average  value  of  freight  cars  producing  revenue  from  $383  to 
$622;  the  average  value  of  steam  colliers  and  tugs  from  $41,533  to 
$55,451 ;  and  the  average  value  of  barges  from  $7930  to  $21,074. 
The  average  freight  train  load  was  194  tons  in  1897  and  403  tons 
in  1907.  Ton-mileage  has  increased  during  the  period  159  per  cent 
and  freight  train  mileage  only  27  per  cent. 

It  is  true  that  no  great  sums  have  been  spent  from  capital  account. 
$5,137,825  in  car  trust  certificates  were  outstanding  on  June  30, 
1907,  and  $5,608,000  in  general  mortgage  bonds  have  been  sold  and 
the  proceeds  invested  principally  in  new  equipment,  but  this  is  all. 
Improvements  have  been  made  mainly  from  earnings,  and  fixed 
charges  have  not  had  to  be  increased.  In  fact,  the  voting  trustees 
stated  at  the  expiration  of  their  trusteeship  in  1904  that,  eliminating 
the  fixed  charges  created  since  December  i,  1896,  on  account  of  the 
acquisition  of  additional  properties  and  interest  upon  the  additional 
mortgage  bonds  issued  for  the  purchase  of  equipment,  the  fixed 
charges  of  the  Reading  system  were  $1,018,065  less  for  the  fiscal 
year  ended  June  30,  1904,  than  they  were  for  the  fiscal  year  ended 
November  30,  1896.* 

It  thus  comes  about  that  the  finances  of  the  Reading,  while  not  as 
secure  as  could  be  desired,  are  yet  in  better  shape  than  they  have 
been  for  thirty  years.  Fixed  charges,  taxes,  and  operating  expenses 2 

1  Chron.  79 :  2087,  1904. 

2  See  the  nineteenth  volume  of  the  Industrial  Commission's  report  for  a  brief  de- 
scription of  the  renewed  attempt  at  consolidation  in  the  anthracite  coal  fields ;  also 
testimony  in  the  case  of  W.  R.  Hearst  against  the  Philadelphia  &  Reading  Railway 
Company. 


PHILADELPHIA    &  READING  145 

took  86  per  cent  of  gross  income  in  1907,  but  a  decline  of  nearly 
$12,000,000  in  net  earnings  must  precede  a  default  on  any  bonds 
outstanding.  To  this  margin  should  be  added  the  considerable 
amount  by  which  maintenance  expenses  now  surpass  normal 
figures.  An  initial  dividend  was  declared  on  the  Reading  Company 
first  preferred  stock  in  August,  1900 ;  on  its  second  preferred  in  Octo- 
ber, 1903;  and  on  its  common  in  February,  1905.  Four  per  cent  is 
now  being  paid  upon  all  classes  of  stock. 

Large  amounts  of  Reading  stock  are  held  by  the  Baltimore  & 
Ohio  and  by  the  Lake  Shore.  The  Reading  has  again  bought  control 
of  the  Central  of  New  Jersey,  and  owns  besides  a  steamship  line 
and  something  under  500  miles  in  other  subsidiary  roads.  Its  large 
earnings,  its  troubles  with  its  mine  employees,  its  influence  over  the 
supply  of  a  necessity  of  life,  and  the  possibility  of  discrimination 
which  its  control  of  both  railroad  and  coal  properties  affords,  have 
made  it  a  target  for  legislative  attack  from  state  and  national  gov- 
ernments. Action  was  begun  by  the  Department  of  Justice  in  1907 
to  dissolve  the  merger  between  the  Reading  and  the  Central  of  New 
Jersey.  In  June  of  the  previous  year  the  so-called  "commodity 
clause"  of  the  Hepburn  Act  forbade  any  railroad  company  to 
transport  in  interstate  commerce  any  article  except  timber  and  the 
manufactured  products  thereof  which  it  should  have  produced,  or 
in  which  it  should  have  any  interest,  except  those  products  necessary 
and  intended  for  its  own  use  in  its  business  as  common  carrier.  The 
legality  of  the  Reading's  position  in  these  matters  is  yet  to  be  decided 
by  the  courts.  The  student  may  well  doubt  whether  legislative 
action  will  ever  succeed  in  preventing  the  common  ownership  of 
the  Reading  railroad  and  mining  interests.  What  is  more  probable 
is  that  a  strict  governmental  control  will  come  to  be  imposed. 
Against  this  proper  development  no  appeal  to  legal  technicalities 
will  avail. 


CHAPTER    V 

THE  SOUTHERN 

Richmond  &  Danville  —  East  Tennessee,  Virginia  &  Georgia  —  Formation  of  the 
Southern  Railway  Security  Company  —  Growth  and  Combinations  —  Failure 
and  reorganization  of  the  East  Tennessee  —  Reversal  of  position  between  the 
Richmond  &  Danville  and  the  Richmond  &  West  Point  Terminal  —  Acquisition 
of  the  Central  of  Georgia  —  Failure  and  reorganization  of  the  whole  system  — 
Subsequent  development. 

Ax  the  present  time  there  are  in  the  South  five  great  railway  sys- 
tems :  the  Atlantic  Coast  Line ;  the  Seaboard  Air  Line ;  the  South- 
ern Railway ;  the  Louisville  &  Nashville  Railroad ;  and  the  Illinois 
Central  Railroad,  which  cover,  in  the  order  named,  the  territory 
between  the  Atlantic  Ocean  and  the  Mississippi  River. 

The  backbone  of  the  Southern  Railway  is  formed  by  the  old 
Richmond  &  Danville  and  East  Tennessee,  Virginia  &  Georgia 
companies :  of  which  the  first  formerly  stretched  with  its  subsidiary 
lines  from  Washington  and  Richmond  on  the  north  to  Atlanta, 
Georgia,  and  Greenville,  Mississippi,  on  the  south  and  west;  and 
the  second  reached  from  Bristol,  Tennessee,  in  a  great  half  circle 
to  the  ocean  at  Brunswick,  Georgia,  and  by  means  of  the  Mobile 
&  Birmingham  straight  to  the  Gulf  at  Mobile. 

The  Richmond  &  Danville  was  opened  hi  1856  between  Rich- 
mond and  Danville,  Virginia.  It  was  largely  aided  by  the  state 
of  Virginia.  Three-fifths  of  its  stock  were  owned  by  the  state  in 
1867,  there  was  a  state  loan  of  $400,000,  and  a  state  guarantee  of 
$200,000  besides.1  In  natural  consequence  the  state  elected  three 
of  the  six  directors.  It  was  not  long,  however,  before  the  state  was 
able  to  relieve  itself  of  a  large  part  of  its  in  vestment.  On  the  3ist 
of  August,  1871,  all  of  the  state  shares  were  taken  over  by  the 

1  The  Virginia  state  bonds  were  redeemable  in  34  years  from  April  8,  1853,  to 
September  30,  1854,  by  the  payment  of  an  annuity  of  7  per  cent.  Of  this  rate  6  per 
cent  covered  the  interest  and  i  per  cent,  by  continuous  reinvestment  at  6  per  cent, 
was  expected  to  yield  the  principal  sum  in  the  34  years  agreed  upon.  Annual  Report, 
1867.  Like  most  new  companies,  the  Richmond  &  Danville  found  difficulty  at 
first  in  meeting  its  obligations,  and  was  obliged  to  issue  bonds  to  provide  for  overdue 
interest  to  the  state  and  to  keep  its  floating  debt  within  bounds.  R.  R.  Gaz.  5 :  499, 
1873,  and  Ibid.  5 :  507,  1873. 


THE  SOUTHERN  147 

Pennsylvania  Railroad  Company.1  The  money  sunk  in  the  com- 
pany's bonds  still  remained.  From  Danville  the  Richmond  &  Dan- 
ville steadily  pushed  south  in  the  years  following  1856.  Under 
the  leadership  of  the  Pennsylvania  it  became  its  ambition  to  open 
direct  rail  communication  from  the  great  Northern  cities  to  the 
heart  of  North  and  South  Carolina  and  Georgia.  To  obtain  a 
ninety-mile  extension  to  Charlotte  the  company  leased  the  North 
Carolina  Railroad,  223  miles  hi  length.1  To  get  into  Atlanta  it  allied 
itself  with  the  Atlanta  &  Richmond  Air  Line  Company,  projected 
to  construct  a  line  between  Atlanta  and  Charlotte.2  In  1878  it 
bought  a  controlling  interest  in  the  Charlotte,  Columbia  &  Au- 
gusta Railroad  and  secured  entrance  to  the  latter  city.3  The  Penn- 
sylvania aided  the  new  enterprise  by  advances  from  time  to 
time,  and  when  the  current  liabilities  became  unmanageable  took 
$1,000,000  of  a  new  refunding  mortgage.4 

Meanwhile  the  East  Tennessee,  Virginia  &  Georgia  Railroad 
had  been  established  to  the  west  of  the  Richmond  &  Danville, 
in  the  heart  of  the  southern  Appalachians.5  This  company  was  a 
consolidation  in  1869  of  the  East  Tennessee  &  Virginia  Railroad, 
from  Bristol,  on  the  boundary  between  Virginia  and  Tennessee, 
to  Knoxville,  Tennessee ;  and  the  East  Tennessee  &  Georgia  Rail- 
road, from  Knoxville,  Tennessee,  to  Dalton,  Georgia.  Both  roads 
were  aided  by  the  state  of  Tennessee.  In  1870,  however,  the  new 
company  extinguished  its  debt  to  the  state  by  the  payment  of 
$4,117,761  hi  state  bonds.  Not  long  after  the  completion  of  its  line 
from  Bristol  to  Dalton,  the  East  Tennessee  fell  under  the  control 
of  the  Pennsylvania  Railroad,  which  already  dominated  its  neighbor 

1  R.  R.  Gaz.  3:  279,  1871.    This  road  stretched  from  Goldsboro  in  the  eastern 
part  of  North  Carolina  to  Charlotte  in  the  southwestern  part,  via  Greensboro.    It 
was  principally  owned  by  the  state  of  North  Carolina.    By  the  terms  of  the  lease 
the  Richmond  &  Danville  agreed  to  pay  $260,000  per  annum  for  thirty  years. 

2  The  whole  road  was  opened  for  traffic  in  September,  1873.    It  went  into  the 
hands  of  a  receiver  in  1874,  and  was  sold  in  foreclosure  in  1876;  but  the  Pennsylvania 
Railroad  relieved  the  Richmond  &  Danville  from  all  collateral  liabilities  incurred  on 
its  account.   The  reorganized  line  was  leased  by  the  Richmond  &  Danville  in  1881. 
Chron.  32:  367,  1881. 

3  Annual  Report,  1878. 
*  Ibid.  1874. 

5  Ulrich  B.  Phillips,  A  History  of  Transportation  in  the  Eastern  Cotton  Belt  to 
1860.  New  York:  The  Columbia  University  Press,  1908,  pp.  372  ff. 


148  RAILROAD  REORGANIZATION 

to  the  east.  To  facilitate  the  control  and  to  unify  the  interests  of 
the  Pennsylvania  south  of  Washington  a  "Southern  Railway  Se- 
curity Company"  was  formed,  with  a  capital  of  $5,000,000.  This 
company  was  entrusted  with  a  majority  of  the  stock  of  the  Rich- 
mond &  Danville  and  of  the  East  Tennessee.  It  also  controlled 
the  Coast  Line  railroads  from  Richmond  to  Charleston,  and  the 
Memphis  &  Charleston  from  Chattanooga  to  Memphis.1  Un- 
fortunately the  financial  results  of  the  combination  were  disap- 
pointing. Of  the  subsidiary  roads  the  East  Tennessee  managed  to 
pay  at  least  3  per  cent  on  its  capital  stock  from  1872  to  1876;  but 
the  Richmond  &  Danville  paid  nothing,  the  Coast  Lines  nothing, 
and  the  Memphis  &  Charleston  barely  earned  the  3  per  cent 
guaranteed  under  its  lease.  In  1873,  therefore,  a  special  meeting 
was  held  at  the  office  of  the  Southern  Railway  Security  Company 
to  consider  the  propriety  of  making  sale  of  certain  properties  of  the 
company.2  In  1874  the  lease  of  the  Memphis  &  Charleston  was 
surrendered,8  and  in  1876  the  bulk  of  the  securities  held,  outside 
of  the  Richmond  &  Danville  stock,  were  disposed  of.4 

The  retirement  of  the  Southern  Railway  Security  Company 
marked  the  beginning  of  the  withdrawal  of  the  Pennsylvania  from 
investment  in  the  South.  For  the  rest,  it  left  the  lines  north  of 
South  Carolina  in  three  main  competing  groups.  There  were  the 
Coast  Lines  from  Richmond  south,  the  Richmond  &  Danville, 
and  the  East  Tennessee,  Virginia  &  Georgia  properties.  And 
stretching  from  west  to  east  was  the  Memphis  &  Charleston, 
which  was  already  in  financial  difficulties  of  a  serious  nature.  All 
three  of  these  groups  were  now  thrown  upon  their  own  resources; 
and  two  of  them,  at  least,  took  vigorous  measures  in  self-protec- 
tion. The  policy  of  the  East  Tennessee  was  the  most  aggressive. 
Shut  up  in  the  narrow  valley  between  the  Clinch  and  the  Great 
Smoky  Mountains,  and  flanked  by  hostile  roads,  it  conceived  it  to 
be  necessary  for  it  to  acquire  connections  to  the  south,  to  the  east, 
and  to  the  west.  Accordingly,  it  leased  the  Memphis  &  Charleston 
in  1877  and  obtained  an  outlet  upon  the  Mississippi  River.5  In 

1  Including  37  miles  of  running  rights  over  the  N.,  C.   &  St.  L. 

2  R.  R.  Gaz.  5:  475,  1873.          3  Ibid.  6:  178,  1874.         4  Ibid.  8:  540,  1876. 

6  The  Memphis  &  Charleston  stockholders  agreed  to  the  lease  in  order  to  avoid 
bankruptcy.  At  a  meeting  in  May,  1877,  it  was  pointed  out  to  them  that  the  net 


THE  SOUTHERN  149 

1878  it  bought  the  Georgia  Southern  and  the  Selma,  Rome  & 
Dalton  and  provided  itself  with  a  line  as  far  south  as  the  Flint  River 
in  Alabama.1  In  1881  it  bought  the  Alabama  Central,  extending 
some  96  miles  west  from  Selma.  The  same  year  it  secured  control 
of  the  Macon  &  Brunswick  hi  Georgia,  and  began  construction 
from  Macon  to  Rome  to  complete  a  line  to  the  South  Atlantic  coast.2 
In  the  north  it  made  an  alliance  with  the  Norfolk  &  Western, 
which  opened  that  company's  line  from  Bristol  to  Norfolk,3  and 
arranged  with  the  Louisville  &  Nashville  and  the  Kentucky  Cen- 
tral for  construction  to  a  connection  at  the  Kentucky-Tennessee 
state  line  which  should  open  to  it  the  business  of  the  Central  West.4 
The  Richmond  &  Danville  fell  under  the  control  of  a  group 
of  capitalists  who  already  controlled  the  Atlantic  Coast  lines  and 
held  an  interest  in  the  East  Tennessee,  and  who  now  bought  the 
24,000  shares  of  Danville  stock  still  held  by  the  Pennsylvania 
Railroad.5  Like  its  rival,  it  enlarged  its  system.  It  leased  the  At- 
lanta &  Charlotte  Air  Line  hi  i88i,6  with  certain  minor  roads  in 
the  Carolinas  and  in  Georgia.  In  1882,  under  the  charter  of  the 
Georgia  Pacific,  it  began  construction  westward  from  Atlanta  to 
the  Mississippi.  It  did  not  stretch  out,  as  did  the  East  Tennessee, 
but  it  secured  a  very  complete  control  of  the  territory  between 

earnings  of  the  road  had  not  been  enough  to  pay  the  interest  on  its  bonds,  and  that 
a  large  amount  was  due  to  the  state  of  Tennessee  which  the  company  had  no  present 
means  of  paying.  Either  an  assessment  on  the  stock  or  a  lease  to  the  East  Tennessee 
was  declared  to  be  necessary.  Accordingly,  a  lease  was  concluded.  The  East  Ten- 
nessee agreed  so  to  discharge  the  principal  of  the  company's  indebtedness  to  the 
state  as  to  reduce  the  annual  interest  account  from  $360,000  to  $310,000  as  a  maxi- 
mum, and  upon  the  fulfilment  of  this  and  of  certain  other  minor  conditions  took 
over  the  operation  of  the  road.  Two  years  later  the  lease  was  extended  for  twenty 
years  at  a  definite  rental  amounting  to  7  per  cent  on  $4,225,000  or  a  yearly  payment 
of  $295,750.  See  R.  R.  Gaz.  9:  421,  1877,  and  Ibid,  u:  672,  1879. 

1  The  Selma,  Rome  &  Dalton  was  bought  from  the  purchasers  at  foreclosure  sale 
for  $2,600,000.    The  Georgia  Southern  cost  $367,369.    Outstanding  debts  were 
assumed.   To  provide  for  these  and  other  outlays  $10,000,000  new  5  per  cent  bonds 
were  authorized.    R.  R.  Gaz.  12:  622,  1880. 

2  This  line  was  completed  in  1882.    Chron.  35:  430,  1882;  R.  R.  Gaz.  13:  420, 
1881. 

3  Chron.  33:  357,  1881. 

4  R.  R.  Gaz.  13:  420,  1881. 

5  Prominent  among  them  were  Messrs.  Clyde,  of  the  Coast  Line  railroads,  Wilson 
and  McGhee  of  the  East  Tennessee,  Stewart,  Plant,  Logan,  and  others. 

6  This  had  been  the  Atlanta  &  Richmond  Air  Line. 


150  RAILROAD  REORGANIZATION 

Richmond  in  the  north  and  Augusta,  Savannah,  and  Atlanta  in 
the  south.  In  1881,  also,  the  Richmond  &  Danville  took  a  step 
destined  to  have  important  consequences.  Since  it  desired  to 
acquire  certain  railroads,  and  since  its  charter  allowed  it  to  hold 
stock  in  none  but  connecting  lines,  it  caused  to  be  incorporated 
a  so-called  Richmond  &  West  Point  Terminal  Railway  &  Ware- 
house Company,  with  authority  to  acquire  stocks  and  bonds  of 
railroad  companies  in  North  Carolina,  South  Carolina,  Tennessee, 
Kentucky,  Georgia,  Alabama,  Mississippi,  and  other  states.  This 
company  increased  its  stock  by  October,  1881,  to  $3,000,000; 
of  which  the  Richmond  &  Danville  then  owned  $1,510,000.  The 
most  important  acquisition  which  it  made  at  the  time  was  the 
Virginia  Midland  Railway,  from  Alexandria,  Virginia,  to  Dan- 
ville ;  but  other  additions  were  to  follow. 

The  independent  action  of  the  Danville  and  East  Tennessee  com- 
panies was  followed  by  a  new  consolidation  which  reunited  most  of 
the  lines  dominated  by  the  old  Security  Company.  In  response  to 
queries  in  August,  1883,  Mr.  Calvin  S.  Brice  admitted  that  a  syndi- 
cate in  which  he  was  interested  had  bought  control  of  the  Richmond 
&  Danville. 

"  We  have  secured,"  said  he,  "about  28,000  of  the  50,000  shares  of 
stock  issued  by  the  Richmond  &  Danville  Company.  Our  syndicate 
controls,  besides  our  new  purchase,  the  East  Tennessee,  Virginia  & 
Georgia  Railway  and  the  Chesapeake  &  York  River  line  of  steamers 
that  ply  between  West  Point,  on  the  Chesapeake,  and  Baltimore, 
and  has  close  traffic  arrangements  with  the  Clyde  steamers,  which 
run  between  New  York  and  Philadelphia  and  all  Southern  points. 
Our  purpose  is  to  confine  all  our  railroad  and  steamship  lines  under 
one  management,  and  to  equip  and  operate  the  system  in  the  best 
possible  manner."  l 

It  appears  from  this  statement  that  the  capitalists  who  controlled 
the  East  Tennessee  now  again  consolidated  with  the  leading  inter- 
ests of  the  Richmond  &  Danville  and  lines  east,  albeit  changes  in 
personnel  and  transfers  of  holdings  occurred.  Return  to  the  old 
combination  was  made  desirable  by  the  more  intimate  connection 
of  the  two  groups  of  roads.  The  Western  North  Carolina  had  been 
opened  across  the  mountains  of  North  Carolina  in  1882.  This  had 

1  Chron.  37:  128,  1883. 


THE  SOUTHERN  151 

made  practicable  the  diversion  of  the  western  traffic  of  the  East 
Tennessee  from  the  Norfolk  &  Western  to  the  Richmond  &  Dan- 
ville ;  a  traffic  which  the  northern  connections  of  the  East  Tennessee 
promised  largely  to  increase.  Consolidation  was  doubtless  also 
prompted  by  the  desire  to  save  the  East  Tennessee  from  serious 
financial  difficulty  which  threatened  it.  It  had  become  apparent 
that  this  company,  at  least,  had  severely  taxed  its  strength  in  the 
rapid  extension  of  mileage  which  had  followed  1876.  Before  that 
time  its  position  had  been  secure.  It  had  possessed  a  monopoly  of 
the  somewhat  limited  local  traffic  between  Chattanooga  and  Bristol, 
and  had  formed  part  of  the  most  direct  route  between  New  York, 
Philadelphia,  Baltimore,  and  Washington,  and  towns  hi  Tennessee, 
Northern  Alabama,  and  Mississippi.  Its  extensions  had  changed 
the  situation.  They  had  brought  it  into  touch  with  the  Mississippi 
River  and  the  Atlantic  Ocean,  and  had  increased  its  fighting  power ; 
but  they  had  also  endowed  it  at  large  cost  with  a  group  of  poorly 
equipped,  unprofitable  lines  located  in  a  keenly  competitive  territory. 
The  Selma,  Rome  &  Dalton  had  been  purchased  just  after  a  fore- 
closure sale.  The  Macon  &  Brunswick  had  never  been  able  to  earn 
much  more  than  working  expenses.  The  Alabama  Central  had  not 
seen  fit  to  publish  its  financial  figures  after  1878,  while  the  Memphis 
&  Charleston,  as  we  have  seen,  had  turned  to  the  East  Tennessee 
only  to  escape  bankruptcy. 

The  East  Tennessee  had  hoped  to  make  profitable  the  lines  which 
it  had  so  rapidly  acquired.  Unfortunately  the  company  was  poorly 
equipped  for  such  a  task.  Its  finance  had  been  extravagant.  In 
1875,  on  269  miles  of  lines  there  had  been  $7317  in  stock  and  $15,- 
620  in  bonds  per  mile.  In  1883  the  mortgage  bonds  and  car  trusts 
outstanding  per  mile  owned  amounted  to  $23,444,  the  income  bonds 
to  $15,404,  and  the  capital  stock  to  $41,079.  A  grand  total  of  $79,927 
as  compared  with  the  $22,937  °f  eight  years  earlier,  and  an  average 
of  almost  $100,000  in  securities  per  mile  of  new  line  acquired! 
Ninety-nine  per  cent  of  net  income  was  being  absorbed  in  paying 
interest  on  all  classes  of  securities,  although  maintenance  figures  were 
kept  as  low  as  $630  per  mile  of  line.  This  large  volume  of  stocks 
and  bonds  made  improvement  from  earnings  impossible,  and  pre- 
vented conservative  management  by  taking  from  the  stockholders 
any  chance  of  dividends,  and  by  reducing  the  quotations  of  common 


152  RAILROAD  REORGANIZATION 

stock  to  less  than  $5  per  share.  And  though  in  some  respects  the 
location  of  the  system  was  good,  the  route  which  it  offered  to  much 
of  its  business  was  indirect,  the  competition  which  it  had  to  meet 
was  severe,  and  its  Atlantic  terminal,  Brunswick,  was  of  small  im- 
portance compared  with  the  thriving  cities  of  Savannah  and  Norfolk. 
The  result  was  a  failure  to  secure  the  gains  from  consolidation  which 
had  been  expected.  Surplus  earnings  were  continuously  small,  and 
current  bills  were  left  to  run ;  until  by  1883  the  floating  debt  had 
become  so  large  that  an  issue  of  $1,200,000  in  debenture  bonds 
was  required  to  take  care  of  it. 

The  failure  of  the  East  Tennessee  to  weld  its  connections  into  an 
efficient  transportation  system  left  it  helpless  in  face  of  the  panic 
of  1884.  Earnings  fell  off  in  that  year,  a  directors'  committee  was 
appointed,1  and  the  resulting  report  revealed  a  plain  inability  on 
the  part  of  the  company  to  meet  its  charges. 

"The  interest  charges  proper  for  the  calendar  year  1885  are,"  said 
the  committee,  $1,476,505.85 

"To  this  must  be  added  the  principal  due  on  car  trusts  and 
debentures  in  1885,  280,954.11 

"Or  a  total  of  $i,757,459-96 

"The  payments  on  similar  account  will  be  — 

in  1886,  $1,739,196.28 

in  1887,  1,720,932.60 

gradually  decreasing  until  the  debentures  and  car  trusts 
being  paid  off  in  1894,  the  total  fixed  charges  for  the  year 
1895  will  be  $1,295,970.00 

"The  net  revenue  for  the  year  1883-4  was  1,699,925.84 

"The  net  revenue  for  1885  and  1886,  allowing  for  the  decrease 
in  earnings  following  the  panic,  and  supposing  the  road  to  be 
operated  for  60  per  cent,  may  be  estimated  at  $1,400,000.00 

"This  will  leave/'  said  the  committee,  "an  annual  deficit  of 
$350,000,  to  which  must  be  added  a  total  of  $1,000,000  required 
by  the  general  manager  for  steel  rails,  iron  bridges,  and  other 
needed  improvements. 

"The  sums  for  covering  these  expenses  should  not  be  raised  by 
temporary  loans,  as  this  would  not  relieve  the  company  of  its  embar- 
rassments nor  place  its  finances  upon  a  sound  footing.  It  cannot 
be  raised  by  an  additional  mortgage,  on  account  of  the  provisions 
of  the  mortgage  securing  the  income  bonds.  It  must  and  can  be 

1  Chron.  39:  733,  1884. 


THE  SOUTHERN  153 

raised  from  a  funding  of  coupons  which  shall  leave  the  earnings  of 
the  company  sufficiently  free  to  meet  the  demands  upon  them.  The 
committee  therefore  recommends: 

(1)  "That  the  holders  of  the  consolidated  5  per  cent  bonds  be 
asked  to  fund  four  coupons,  being  those  maturing  January  and 
July  i,  1885,  and  January  and    July  i,  1886,  by  depositing  said 
four  coupons  with  the  Central  Trust  Company  of  New  York,  as 
trustee,  and  receiving  instead  the  company's  funded  coupon  bond 
dated  July  i,  1885,  and  bearing  6  per  cent  interest  per  annum  from 
that  date,  .  .  .  which  bond  shall  run  ten  years  from  its  date  and 
be  redeemable  at  the  pleasure  of  the  company  at  par  and  accrued 
interest  after  three  years,  on  three  months'  notice ;  such  funded  cou- 
pon bond  to  be  secured  by  the  coupons  so  deposited,  the  lien  of 
which  will  be  hi  all  respects  preserved. 

"The  total  extensions  under  this  clause  would  be  $1,467,400. 

(2)  "That  the  holders  of  the  $2,000,000  of  the  Cincinnati    & 
Georgia  Division  first  mortgage  6  per  cent  bonds  be  asked  to  fund 
four  coupons,  .  .  .  being  those  maturing  March  and  September  i, 
1885,  and  March  and  September  i,  1886,  .  .  .  and  accepting  in 
lieu  thereof  a  funded  coupon  bond  .  .  .  dated  September  i,  1885. 

"  The  total  amount  extended  under  this  clause  would  be  $240,000. 

(3)  "That  the  holders  of  the  debentures  be  asked  to  extend  for 
ten  years  such  of  the  debentures  as  fall  due  during  the  years  1885 
and  1886,  and  to  accept  similar  debentures  running  from  five  to  ten 
years,  for  the  interest.  .  .  . 

"The  total  amount  extended  under  this  clause  would  be  $373,200. 

(4)  "That  an  arrangement  be  made  with  the  holders  of  the  car 
trust  certificates  of  the  company,  series  A,  for  an  extension  for  ten 
years  of  all  the  payments  of  principal  falling  due  in  1885  and  1886, 
being  $100,000  in  each  year. 

"The    total    amount    extended    under    this   clause   would   be 

$200,000."  l 

The  committee  had  an  apology  to  offer  for  the  state  in  which  the 
company  was  placed.  "The  actual  cost  of  the  190  miles  of  the  new 
roads  constructed  by  the  company  has  largely  exceeded,"  said  they, 
"the  estimated  cost.  The  physical  condition  of  the  roads  purchased 
by  the  company  necessitated  the  expenditure  of  large  sums  in  the 

1  Chron.  40:  29,  1885. 


154  RAILROAD  REORGANIZATION 

improvement  of  roadway  and  track ;  the  construction  and  reconstruc- 
tion of  bridge  masonry  and  bridge  superstructure.  The  facilities  for 
the  conduct  of  the  company's  business  were  entirely  inadequate 
to  the  requirements  of  its  increasing  traffic  and  had  to  be  enlarged. 
Unfortunately  the  company  did  not  fully  provide  for  these  expend- 
itures, and  the  shrinkage  of  the  value  of  its  securities  greatly  aggra- 
vated the  evil."  This  much  was  very  true.  In  its  criticism  of  existing 
facilities  the  committee  was  on  sure  ground.  In  its  suggestions  for 
relief  it  was  less  well  advised.  It  seems  to  have  felt  that  the  East 
Tennessee's  difficulties  were  due  to  a  temporary  inability  to  raise 
cash  for  the  improvement  of  its  roadbed  and  equipment,  and  that 
the  suspension  of  certain  charges  for  a  few  years  would  allow  the 
expenditure  of  liberal  sums  from  income,  ensure  the  improvement 
of  the  road,  and  bring  about  a  condition  of  permanent  prosperity. 
The  truth  was  that  the  East  Tennessee  was  in  too  bad  a  shape  to  be 
reestablished  by  such  means.  The  heavily  burdened  and  physically 
defective  lines  which  made  up  the  system  were  past  being  restored 
from  income  even  with  the  aid  of  a  funding  of  a  few  years'  coupons. 
They  required  a  definitive  surrender  of  portions  of  the  claims  against 
them,  extensive  new  charges  to  capital  account,  and  a  correspond- 
ingly complete  reconstruction  of  their  whole  operating  plant.1  The 
practical  service  which  the  committee  rendered  was  not  in  suggest- 
ing an  adequate  remedy  for  existing  troubles,  but  in  making  plain 
how  serious  these  troubles  were.  So  imminent,  in  fact,  did  they 
show  collapse  to  be,  that  the  management  determined  to  forestall 
hostile  action  by  themselves  asking  for  the  appointment  of  a  receiver ; 
and  on  January  7  the  Circuit  Court  appointed  Henry  Fink  to  that 
position.2  The  committee's  funding  scheme  fell  of  its  own  weight. 

1  The  committee  overestimated  the  net  earnings  of  the  next  few  years.    Instead 
of  $1,400,000  each  year  these  proved  to  be  $1,288,343  in  1885  and  $1,382,749  in 
1886. 

2  Chron.  40:  60,  1885.    There  was  some  dispute  as  to  the  jurisdiction  of  the 
different  courts  in  this  connection.   The  Circuit  Court  appointed  Mr.  Fink  receiver 
for  the  whole  line  on  January  7.  The  next  day  a  state  court  appointed  R.  T.  Dorsey 
and  E.  P.  Alexander  receivers  for  the  lines  in  Georgia  under  another  mortgage. 
This  suit  was  removed  to  the  Federal  Court  and  Dorsey,  who  had  meantime  been 
appointed  sole  receiver  in  Georgia,  was  displaced.    Subsequently  the  Georgia  Su- 
preme Court  held  that  the  transfer  was  illegal,  and  Dorsey  vainly  endeavored  to 
regain  his  position.  The  dispute  was  ended  by  the  withdrawal  of  the  suit  upon  which 
the  Georgia  application  was  based. 


THE  SOUTHERN  155 

The  decrease  in  the  earnings  of  the  company,  a  truer  appreciation 
of  its  condition,  and,  it  may  be  surmised,  the  influence  of  New  York 
banking  houses,  forced  it  to  make  room  for  a  thorough  plan  of 
financial  reconstruction. 

Action  looking  toward  reorganization  of  the  East  Tennessee, 
Virginia  &  Georgia  began  with  the  year  1886.  In  January  Mr. 
Nelson  Robinson,1  who  had  held  proxies  for  a  controlling  stock 
interest  at  the  previous  election,  returned  from  Europe;  and  after 
a  conference  with  certain  large  bondholders  agreed  with  them  to 
draft  a  plan  for  the  reorganization  of  the  property.  A  reorganiza- 
tion committee  was  chosen  from  members  of  large  banking  firms,2 
meetings  were  held,  and  in  the  first  part  of  February,  1886,  a  scheme 
was  put  forth.  This  plan  comprised  the  following  points: 

(1)  Reduction  of  fixed  charges; 

(2)  Exchange  of  new  bonds  and  preferred  stock  for  old  bonds; 

(3)  Assessment  on  the  junior  securities; 

(4)  Foreclosure. 

Foreclosure  was  to  take  place  under  the  consolidated  mortgage. 
A  new  5  per  cent  seventy-year  consolidated  mortgage  was  then 
to  be  created.  Enough  of  the  bonds  under  this  mortgage  were  to 
be  reserved  to  retire  the  liens  prior  to  the  existing  consolidated 
mortgage  as  they  should  mature,  and  the  balance  was  to  be  used 
for  taking  up  the  outstanding  consolidated  mortgage  bonds,  the 
Cincinnati  &  Georgia  division  bonds,  and  the  ten-year  debentures. 
It  was  estimated  that  the  exchanges  would  reduce  the  annual  interest 
charge  from  $1,757,460  to  $994,737.*  This  necessitated  consider- 
able demands  upon  old  securityholders.  Thus  the  old  consolidated 
mortgage  bonds  bearing  5  per  cent  received  only  60  per  cent  of 
their  face  value  in  new  consolidated  bonds  with  the  same  rate  of 
interest;  and  the  old  6  per  cent  Cincinnati  &  Georgia  division 

1  Son-in-law  of  George  Seney. 

2  This  committee  was  chosen  by  the  consolidated  bondholders.    Its  membership 
consisted  of  Robert  Fleming,  a  representative  of  the  foreign  holders ;  Charles  McGhee, 
president  of  the  Memphis  &  Charleston ;  G.  W.  Smith,  of  Kountze  Bros. ;  Frederic 
D.  Tappan,  president  of  the  Gallatin  National  Bank;  E.  W.  Corlies,  vice-president 
of  the  Bank  of  America;  and  Frederick  P.  Olcott,  president  of  the  Central  Trust 
Company,  which  was  trustee  of  the  mortgages  of  the  company.  Chron.  42 :  155,  1886. 

3  As  might  have  been  expected,  this  estimate  was  too  optimistic.   The  actual  re- 
duction was  to  $1,167,000.   Even  this  constituted  a  cut  of  about  one-third. 


156  RAILROAD  REORGANIZATION 

bonds  received  only  48  per  cent  in  consols,  besides  suffering  a 
decrease  in  interest  rate  from  6  to  5  per  cent.  The  difference  was 
made  up  by  the  allowance  of  preferred  stock,  to  which,  moreover, 
was  given  the  right  for  five  years  to  elect  a  majority  of  the  board 
of  directors,  unless  before  that  time  the  new  company  should  have 
paid  out  of  its  net  earnings  5  per  cent  dividends  on  such  preferred 
stock  for  two  full  successive  years.  To  the  Cincinnati  &  Georgia 
division  bonds  were  given  62  per  cent  in  new  first  preferred  besides 
the  48  per  cent  in  bonds,  —  a  total  of  no  per  cent ;  upon  which  the 
yield  in  prosperous  times  might  exactly  equal  the  yield  on  the 
securities  which  they  surrendered.  To  the  consolidated  bonds  were 
given  50  per  cent  in  new  first  preferred,  making  possible  a  total 
return  greater  than  that  which  they  had  formerly  enjoyed.  For 
the  debentures  was  made  the  same  provision  as  for  the  divisional 
bonds.  In  order  that  net  earnings  might  go  first  of  all  to  the  prior 
liens  and  to  the  above  securities,  new  second  preferred  and  common 
stock  was  issued  for  the  benefit  of  the  old  income  bonds  and  stock. 
Of  these  the  income  bonds  received  100  per  cent  in  new  second 
preferred;  while  the  old  preferred  received  100  per  cent  and  the 
old  common  stock  40  per  cent  in  new  common.  Only  in  return  for 
their  assessments  did  the  income  bonds  receive  first  preferred  stock, 
and  even  for  their  assessment  the  common  stock  took  second 
preferred.  Cash  assessments  were  5  per  cent  on  the  income  mort- 
gage and  6  per  cent  on  the  new  common  stock.  This  was  expected 
to  yield  $2,475,000,  which,  with  a  surplus  of  new  securities  in  the 
treasury  of  $1,534,000,  was  thought  sufficient  to  liquidate  out- 
standing car  trusts  and  to  provide  the  company  with  a  fund  avail- 
able for  future  use.1 

The  plan  may  be  criticised  in  some  respects.  It  made  no  ade- 
quate provision  for  future  capital  requirements.  Two  millions  and 
a  half  of  cash  and  two  millions  of  securities  were  considerable  sums 
in  hand,  but  of  these  over  half  a  million  was  in  the  form  of  stock, 
and  from  the  rest  had  to  be  deducted  at  least  a  million  and  a  half 
for  the  liquidation  of  car  trusts.  This  left,  it  is  true,  enough  for 
existing  needs,2  but  it  did  not  allow  for  constantly  recurring 

1  Chron.  42:  186-7,  l886-   See  also  Poor's  Manual  for  1886. 

2  The  reader  will  remember  that  that  same  year  the  general  manager  had  estimated 
the  sum  required  for  steel  rails,  iron  bridges,  and  other  improvements  at  $1,000,000. 


THE  SOUTHERN  157 

and  legitimate  demands  for  improvements  out  of  capital  in  future 
years.  Moreover,  the  securities  given  for  the  consolidated,  the 
Cincinnati  &  Georgia  division,  and  the  debenture  bonds  exceeded 
by  10  per  cent  the  nominal  value  of  the  bonds  retired  by  them. 
But  on  the  whole  the  reorganization  plan  was  an  excellent  attempt 
to  solve  a  difficult  problem.  It  proceeded  on  a  sound  principle, 
it  laid  the  burden  on  the  proper  parties,  it  avoided  a  funding  of 
current  liabilities,  and  even  in  respect  to  the  volume  of  securities 
outstanding  it  accomplished  a  much  needed  reform  by  wiping  out 
60  per  cent  of  the  almost  worthless  common  stock.1  It  was  ac- 
cordingly accepted  by  the  securityholders.  On  March  18,  the 
reorganization  committee  obtained  a  decree  of  sale.2  By  May  i, 
practically  all  the  consolidated  and  income  bonds,  with  a  major- 
ity of  the  preferred  stock,  had  assented;  3  and  on  May  25,  1886, 
the  East  Tennessee,  Virginia  &  Georgia  Railroad  was  sold  for 
$10,250,000  to  a  representative  of  the  reorganization  committee. 
Previous  to  this  the  opposition  committee,  which  had  been  formed 
by  the  minority  stockholders,  had  disbanded.4  The  final  step  was 
the  organization  of  the  East  Tennessee,  Virginia  &  Georgia  Rail- 

1  It  is  true  that  the  severity  of  the  treatment  of  the  junior  securities  caused  sharp 
protest.  A  number  of  the  stockholders  met  in  New  York  February  23,  and  appointed 
a  committee  to  prepare  a  plan  of  assessment  and  to  oppose  foreclosure.    Under  the 
auspices  of  this  committee,  Messrs.  William  H.  Sistare  and  Harold  Clemens  filed 
a  suit  against  the  reorganization  committee  of  the  East  Tennessee  Company.   The 
capitalization   of   the  company,  said  they,  had  been  fraudulently  inflated   by  the 
members  of  the  Thompson-Seney-Brice  syndicate.     By  false  reports  these  financiers 
had  unloaded  upon  the  public  securities  which  they  had  previously  distributed 
among  themselves,  and  then  had  entered  upon  a  scheme  for  wrecking  the  property. 
The  suits  made  specific  charges  of  irregularity,  and  prayed  for  relief.   Ry.  Age,  1 1 : 
192,  1886. 

2  Chron.  42:  364,  1886.  3  Ibid.  42:  575,  1886. 

4  Ibid.  42:  663,  1886.  In  a  circular  to  their  constituents  this  committee  said: 
"  That  after  a  full  and  satisfactory  presentation  of  the  case  by  very  able  counsel  it 
appeared  that  the  committee  had  been  misinformed  as  to  the  material  facts  upon 
which  their  case  was  predicated.  It  especially  appeared  to  the  Court  that  there  was 
no  ground  for  the  charge  of  fraud  against  the  directors  of  the  Company  or  the  Central 
Trust  Company.  It  further  appeared  that  the  litigation  must  be  a  protracted  one, 
without  substantial  benefit  to  either  party.  Your  committee  were  not  willing  to  assume 
the  responsibility  of  such  a  contest,  in  view  of  the  expressed  willingness  of  the  ma- 
jority to  give  to  the  minority  the  same  terms  which  they  had  accepted  for  themselves. 
It  was  deemed  wise  to  harmonize  all  interests,  and  join  hands  to  promote  the  future 
of  the  property.*' 


158  RAILROAD  REORGANIZATION 

way,  which  on  July  i  took  over  the  title  to  the  East  Tennessee, 
Virginia  &  Georgia  Railroad  and  branches,  a  controlling  interest 
in  the  stock  of  the  Knoxville  &  Ohio,  and  a  controlling  inter- 
est in  the  stock  of  the  Memphis  &  Charleston  Railroad  Company.1 

During  this  time  the  Richmond  &  Danville  had  not  been  stand- 
ing still.  It  will  be  remembered  that  in  1883  the  capitalists  who 
dominated  the  East  Tennessee  and  the  Coast  Lines  had  pur- 
chased a  controlling  interest  in  this  company,  with  the  purpose, 
according  to  Mr.  Brice,  of  confining  all  their  railroad  and  steam- 
ship lines  under  one  management  and  of  operating  the  system  in  the 
best  possible  manner.  These  gentlemen  had  found  the  earnings 
of  the  Richmond  &  Danville  sufficiently  unsatisfactory  and  the 
need  for  improvements  sufficiently  great  to  lead  them  to  pass  the 
interest  on  its  debenture  bonds  in  October,  1883.  The  net  earn- 
ings for  1882,  out  of  which  this  dividend  would  have  been  paid, 
they  found  had  been  fully  taken  up  by  the  fixed  charges  and  the 
expenses  for  new  equipment  and  betterments.  The  net  earnings 
for  1883  they  believed  sure  to  show  large  gains,  but  still  not  likely 
to  be  equal  to  necessary  expenditures.2  Strict  economy  was  to  be 
the  order  of  the  day.  In  the  three  previous  years  the  company 
had  accumulated  a  large  floating  debt.  This  the  new  management 
reduced  more  than  one-half  by  the  end  of  1885.  The  funded  debt 
it  allowed  to  increase  largely,  but  the  earnings  it  managed  somewhat 
to  improve.  In  general,  however,  it  secured  no  very  striking  gains. 
Union  in  interest  with  the  East  Tennessee  and  the  Coast  Lines 
modified  the  severity  of  competition,  but  the  panic  of  1884  checked 
business,  and  the  real  saving  in  operating  cost  was  very  slight.3 

In  their  search  for  means  to  reduce  expenses  the  owners  of  the 
Richmond  &  Danville  came  across  the  Richmond  &  West  Point 
Terminal  Company.  By  1884  this  company  was  in  peaceful  pos- 

1  Annual  Report,  East  Tennessee,  Virginia  &  Georgia,  1887. 

2  Chron.  37 :  344,  1883.   The  debentures  were  cumulative  income  bonds  entitled 
to  6  per  cent  out  of  earnings  after  payment  of  interest,  rentals,  and  operating  expenses, 
including  expenditures  made  for  the  repair,  renewal,  and  improvement  of  existing 
property  and  equipment  necessary  for  the  proper  conduct  of  the  business  of  the 
railroad.    Certain  provisions  of  the  mortgage  protected  them  against  the  insertion 
of  new  mortgage  bonds  before  them.    Chron.  37 :  373,  1883. 

3  Curiously  enough  the  chief  saving  seems  to  have  been  in  maintenance  of  cars,  an 
expenditure  which  one  would  expect  to  be  least  affected  by  the  syndicate  control. 


THE  SOUTHERN  159 

session  of  1815.8  miles  of  railroad,  which  included  all  the  import- 
ant branches  of  the  Richmond  &  Danville  except  the  North 
Carolina  Railroad,  from  Goldsboro  to  Charlotte,  and  the  Atlanta 
&  Charlotte  Air  Line,  from  Charlotte  to  Atlanta.  It  had  been 
obliged  to  issue  notes  to  retire  its  floating  debt  in  1883,*  but  had 
no  earnings  apart  from  dividends  on  the  stock  which  it  held,  and 
no  expenses  other  than  its  cost  of  administration  and  the  interest 
on  the  notes  above  mentioned  and  on  its  floating  debt.  There 
was  a  possibility,  nevertheless,  that  the  maintenance  of  the  com- 
pany involved  the  Richmond  &  Danville  in  unnecessary  outlay, 
and  caused  a  certain  loss  of  efficiency  through  indirectness  of  con- 
trol. The  Terminal  Company  had  originally  been  necessary  be- 
cause the  Richmond  &  Danville  could  by  its  charter  hold  stock 
in  none  but  connecting  lines.  By  1885  this  prohibition  had  been 
removed,  and  there  was  open  an  opportunity  to  consolidate  the 
system. 

Early  in  1886  the  directors  of  the  Richmond  &  Danville  ap- 
pointed a  committee  to  report  a  plan  of  union  with  the  Richmond 
&  West  Point  Terminal.2  Apparently  this  committee  recom- 
mended the  elimination  of  the  Terminal  Company;  for  in  April 
it  was  known  that  the  Richmond  &  Danville  was  trying  to  buy 
from  the  Terminal  the  stock  of  certain  of  the  more  important 
branches  which  it  had  formerly  controlled.3  In  that  month  the 
Richmond  &  Danville  leased  the  Virginia  Midland  Railway 4 
and  the  Western  North  Carolina ;  hi  May  it  took  over  the  Charlotte, 
Columbia  &  Augusta  and  the  Columbia  &  Greenville;  in  June 
the  Northeastern  of  Georgia;  and  in  October  the  Washington, 
Ohio  &  Western,  or  a  total  of  1483  miles  out  of  the  1839  held  by 
the  central  corporation.5  At  the  same  time  the  Richmond  &  Dan- 
ville transferred  into  its  own  treasury  $13,617,400  in  stock  and 
bonds  of  subsidiary  companies,  giving  in  return  25,000  shares  of 
the  Terminal's  own  stock,  and  a  guarantee  of  the  Virginia  Mid- 
land's general  mortgage  bonds.  This  done,  the  Danville  Railroad 
threw  the  rest  of  its  holdings  of  Terminal  stock  upon  the  market ; 

1  Chron.  36:  56,  1883.       2  R.  R.  Gaz.  18:  138,  1886.       *  Chron.  42:575,  1886. 

4  The  Richmond  &  Danville  guaranteed  interest  on  some  $12,500,000  of  Virginia 
Midland  bonds. 

5  Cf.  Poor's  Manual  for  1887. 


160  RAILROAD  REORGANIZATION1 

where  they  were  bought  by  investors  who  knew  nothing  of  the 
above  transactions.  The  operation  left  the  Terminal  high  and 
dry.  It  was  of  no  further  use  to  the  Richmond  &  Danville,  for 
that  company  had  made  arrangements  with  its  branch  lines  direct ; 
and  it  could  not  launch  upon  an  independent  existence,  because 
the  greater  part  of  its  mileage  was  in  its  rival's  hands. 

Fortunately  for  the  small  Terminal  holders  it  so  happened  that 
men  of  large  wealth  and  resourcefulness  were  interested  with 
them.  Under  the  leadership  of  these  capitalists  the  Terminal 
Company  began  in  its  turn  the  purchase  of  Danville  stock.  It 
may  have  been  that  the  East  Tennessee  group  who  had  acquired 
a  majority  in  1883  had  meantime  parted  with  their  holdings,  or 
members  of  that  syndicate  may  have  sold  in  1886  to  take  advant- 
age of  a  favorable  price.1  At  any  rate,  25,000  shares  were  rapidly 
acquired,  and  the  control  of  the  company  obtained.  This  done 
the  new  Terminal  interests  turned  to  the  East  Tennessee,  Vir- 
ginia &  Georgia.  Negotiations  were  at  once  begun,  and  culmi- 
nated in  an  agreement  in  1887  by  which  the  Brice-Thomas  group 
sold  65,000  shares  of  East  Tennessee  first  preferred  for  $4,000,000 
in  cash  and  50,000  shares  of  new  Terminal  common.  Since  the 
Tennessee  first  preferred  elected  a  majority  of  the  directors  this 
ensured  control.  At  the  same  time  the  Richmond  Terminal  pro- 
vided for  its  floating  debt,  and  for  the  purchase  of  the  balance  of 
the  Richmond  &  Danville  shares  outstanding.2 

1  The  very  high  average  price  of  $200  per  share  was  reported  to  have  been  paid. 
R.  R.  Gaz.  18:  825, 1886;  cf.  R.  R.  Gaz.  19:  162-3,  1887.  The  Terminal  Company 
issued  $5,000,000  new  preferred  and  $9,000,000  common  stock.    Of  this  it  sold  the 
preferred  and  $7,500,000  of  the  common,  giving  to  every  holder  of  100  of  its  shares 
the  right  to  subscribe  to  the  extent  of  one-third  of  the  par  value  of  his  stock,  and  to 
receive  for  his  subscription  33 $  shares  of  the  new  preferred  and  50  shares  of  com- 
mon.    Then  to  the  $5,000,000  cash  thus  secured  the  Terminal  Company  added  the 
$1,500,000  common  stock  left  from  its  $9,000,000  issue,  and  turned  the  whole  over 
to  the  Richmond  &  Danville  in  payment  for  the  securities  which  it  had  purchased. 
R.  R.  Gaz.  18:  825,  1886. 

2  The  floating  debt  amounted  to  $3,161,325  when  Mr.  Sully  assumed  the  presi- 
dency, and  $1,708,700  of  it  matured  January  i.    Chron.  44:  401,  1887.    To  provide 
for  it,  and  for  the  Richmond  &  Danville  shares,  $5,500,000  6  per  cent  collateral 
trust  bonds  were  issued,  secured  by  East  Tennessee  first  preferred,  Richmond   & 
Danville  stock,  Columbia  &  Greenville  stock,  Virginia  Midland  stock,  and  Western 
North  Carolina  bonds;  and  also  $16,000,000  common  stock.   The  bonds  were  sold 
for  cash  and  the  returns  applied  to  the  East  Tennessee  purchase  and  to  the  floating 


THE  SOUTHERN  l6l 

Thus  was  the  Richmond  &  West  Point  Terminal  Company 
saved,  and  the  principal  railroads  east  and  west  of  the  southern 
Appalachians  still  kept  under  common  control.  The  new  group- 
ing was  weaker  than  the  old,  however,  in  that  it  did  not  include 
the  Coast  Line  railroads.  It  was  also  imperfect  as  regards  the  nature 
of  the  control  possessed  over  the  East  Tennessee,  Virginia  &  Georgia. 
It  has  been  said  that  the  Richmond  Terminal  held  a  majority  of 
the  first  preferred  stock  of  this  latter  road.1  By  the  terms  of  the 
Tennessee  reorganization  of  1886  this  stock  was  to  have  the  right 
for  five  years  to  elect  a  majority  of  the  directors,  unless  before 
that  time  it  should  have  received  5  per  cent  dividends  for  two 
successive  years.  This  gave  control  to  the  Terminal  Company; 
but  it  plainly  made  a  control  precarious  which  rested,  as  this  did, 
on  ownership  of  first  preferred  alone.  In  1887  4  per  cent  was 
paid  in  dividends,  and  in  1888  5  per  cent.  In  1888,  accordingly, 
a  lease  was  drawn  up,  and  the  Richmond  &  Danville  took  the 
operation  of  the  road  for  ninety  nine  years.  For  four  years  it  agreed 
to  pay  over  33 J  per  cent  of  the  gross  earnings ;  for  five  years  more 
35  per  cent ;  and  so  on  until  37  per  cent  should  be  reached.  And, 
further,  it  guaranteed  that  the  percentage  allowed  should  be  suf- 
ficient to  pay  all  the  East  Tennessee's  fixed  charges,  including 
5  per  cent  annually  on  the  first  preferred  shares  outstanding.2 

It  cannot  be  denied  that  the  ethics  of  the  Tennessee's  lease  were 
questionable.  The  East  Tennessee  reorganization  had  invested 
the  first  preferred  stock  of  that  company  with  temporary  author- 
ity. To  use  this  to  bind  the  property  for  years  to  come  was  neither 
fair  to  the  other  stockholders,  nor  in  accordance  with  the  spirit 
of  the  reorganization  plan.  We  need  not,  therefore,  be  surprised 
at  the  prompt  application  for  an  injunction  and  for  the  appoint- 
ment of  a  receiver  which  occurred.3  In  a  circular  to  the  second 
preferred  and  junior  stockholders  the  opponents  of  the  lease  urged 
that  its  consummation  would  constitute  an  abuse  of  power  on  the 

debt;  $5,000,000  of  the  stock  went  for  East  Tennessee  first  preferred,  and  the  rest 
for  Richmond  &  Danville  common,  Washington,  Ohio  &  Western  stock  and 
income  bonds,  and  for  other  purposes.  Chron.  44:  149,  1887.  Also  Poor's  Manual, 
1890. 

1  It  was  reported  that  the  East  Tennessee  first  preferred  stock  had  been  offered 
to  the  Norfolk  &  Western  before  the  Richmond  Terminal  acquired  it. 

2  Chron.  47:  410,  1888.  3  Chron.  47:  532,  1888. 


1 62  RAILROAD  REORGANIZATION 

part  of  the  existing  board ;  that  it  was  entirely  in  the  interests  of 
the  first  preferred  stockholders;  that  under  no  circumstances 
could  the  junior  stockholders  derive  any  income  from  the  lease; 
that  it  failed  to  provide  other  safeguards  and  was  in  many  respects 
improvident  and  imperfect.  In  one  suit  before  State  Chancellor 
Gibson  at  Knoxville,  Tennessee,  emphasis  was  laid  on  the  statutory 
prohibition  of  the  consolidation  of  competing  lines.  In  another, 
petition  was  even  made  that  the  holders  of  the  first  preferred  stock 
be  enjoined  from  electing  a  majority  of  the  board  of  directors  at 
the  approaching  meeting.1  Chancellor  Gibson  handed  down  two 
vigorous  opinions.  He  refused  to  enjoin  the  voting  of  the  first 
preferred  stock,  on  the  ground  that  the  plaintiffs  had  been  in  pos- 
session for  two  years  of  stock  certificates  which  bore  on  their  face 
the  conditions  and  agreements  under  which  they  were  issued,  and 
that  the  complaint  was  not  justified,  either  in  law  or  equity.2  But 
he  held  that  the  East  Tennessee  had  no  power  under  its  charter 
to  lease  its  road  as  it  had  done ;  that  the  combination  of  the  East 
Tennessee  and  the  Richmond  &  Danville  was  forbidden  by  the 
law  of  Tennessee  against  the  consolidation  of  competing  lines; 
and  that  similar  prohibitions  in  the  laws  and  constitution  of  Georgia 
were  so  stringent  as  to  imperil  the  East  Tennessee's  charter  in 
case  the  lease  should  be  carried  through.3  This  effectually  checked 
the  lease.  After  Chancellor  Gibson's  first  opinion  the  East  Ten- 
nessee election  had  been  held  and  the  arrangement  with  the  Rich- 
mond &  Danville  approved.4  After  his  second  the  lease  was  can- 
celled, and  the  management  of  the  East  Tennessee  restored  to  its 
own  officers.5  The  Richmond  Terminal  was  still  left  in  control 
of  the  property.  It  was  forced,  however,  to  secure  a  majority  of 
all  the  East  Tennessee  stock  outstanding  if  it  wished  to  make  its 
control  permanent,  and  it  was  prevented  from  using  the  power 
temporarily  given  a  section  of  the  stock  to  bring  about  a  ninety- 
nine -year  arrangement  distasteful  to  the  majority. 

Master  of  the  Richmond  &  Danville,  the  East  Tennessee,  and 
their  allied  lines,  the  Richmond  Terminal  now  took  one  step  fur- 
ther; it  acquired  the  Central  Railroad  &  Banking  Company  of 

1  Chron.  47:  532,  1888;  Ry.  Rev.  28:  663,  1888;  R.  R.  Gaz.  20:  778,  1888. 
8  Chron.  47:  625,  1888.  •  Chron.  47:  663,  1888. 

4  Ry.  Rev.  28 :  679,  1888.  •  Ry.  Age,  13 :  788,  1888. 


THE  SOUTHERN  163 

Georgia.  The  importance  of  this  was  very  great.  The  Central 
Company  owned  the  most  considerable  of  the  lines  in  Georgia  and 
Eastern  Alabama.  It  stretched  from  Savannah  and  Port  Royal 
on  the  Atlantic  coast  to  Spartanburg,  South  Carolina,  on  the  north ; 
to  Atlanta,  Birmingham,  and  Montgomery  on  the  west;  and  to 
Albany,  Georgia,  and  to  Columbia  on  the  south.  Its  system  had 
been  formed  by  a  consolidation  in  1872  of  the  Central  Railroad 
from  Savannah  to  Macon  with  the  Macon  &  Western  from  Macon 
to  Atlanta,1  and  was  compact,  ably  managed,  and  profitable.  Pre- 
vious to  June,  1847,  the  Central  Railroad  Company  had  paid  seven 
dividends  aggregating  10.68  per  cent.  From  June,  1847,  to  June, 
1889,  the  Central  Railroad  and  the  Central  Railroad  &  Banking 
Company  which  succeeded  it,  had  paid  seventy-five  dividends 
aggregating  337.5  per  cent,2  besides  stock  dividends  of  8  per  cent 
hi  1854  and  12  per  cent  in  1861,  and  a  dividend  of  40  per  cent  in 
certificates  of  indebtedness  in  1881.  It  was  paying  8  per  cent  in 
1888  when  the  Richmond  &  Danville  was  paying  5,  and  the  East 
Tennessee  was  congratulating  itself  on  the  5  per  cent  which  it  was 
able  to  turn  over  to  its  first  preferred  stock.3 

So  fruitful  a  piece  of  railroad  property  was  naturally  looked  on 
as  desirable,  especially  since  its  acquisition  was  to  free  the  East 
Tennessee  from  one  of  its  most  dangerous  competitors.  From  a 
traffic  point  of  view,  nevertheless,  the  advantages  of  a  consolida- 
tion were  doubtful.  The  local  business  of  the  Central  was  likely 
to  be  little  increased  by  a  merger.  The  through  business  was  in 
danger  of  being  decreased.  The  Central  lines  ran  on  the  whole 
east  and  west.  It  was  to  their  interest  to  carry  freight  from  Georgia, 
Alabama,  and  the  West  to  Savannah,  and  thence  to  send  it  north 
by  way  of  the  Ocean  Steamship  Company  which  they  controlled, 
and  from  which  they  obtained  in  1889  one-fifth  of  their  total  net 
earnings;  while  the  Richmond  Terminal's  interest  was  to  send 

1  Cf.  Central  Railroad  Company  vs.  Georgia,  2  Otto,  665.   The  Central  Railroad 
was  granted  certain  exemptions  from  taxation,  and  the  question  came  up  in  1874 
whether  the  right  to  these  exemptions  was  surrendered  by  consolidation  with  the 
Macon  &  Western,  and  whether,  if  not,  they  extended  to  the  Macon  &  Western  as 
well  as  to  the  original  company. 

2  Including  67  per  cent  paid  in  Confederate  notes  during  the  war. 

3  See  Ulrich  B.  Phillips,  op.  tit.,  chap,  vi,  for  the  early  history  of  the  Central 
of  Georgia  Railroad  System. 


164  RAILROAD  REORGANIZATION 

this  traffic  north  by  land  so  as  to  secure  for  its  own  railroads  the 
long  haul.  The  advantages  to  the  Terminal  of  a  union  depended 
on  the  price  at  which  the  Central  Railroad  could  be  acquired.  The 
purchase  was  made,  and  the  price  was  a  high  one.  And  this  price 
was  paid,  it  was  freely  charged,  not  in  pursuance  of  an  honest 
though  mistaken  judgment,  but  in  order  to  allow  a  large  personal 
gain  to  individual  capitalists  who  were  interested  in  both  the  Cen- 
tral and  the  Terminal  Companies. 

Among  the  most  prominent  owners  of  Central  of  Georgia  stock  at 
this  time  were  members  of  the  Logan-Rice  group  of  financiers,  who 
had  begun  to  accumulate  holdings  at  least  as  early  as  1886.  The  av- 
erage price  which  these  parties  paid  was  later  estimated  at  130,  and 
their  holdings  were  apparently  secured  with  a  view  to  resale  at  a 
higher  figure.  At  any  rate,  when  40,000  shares  had  been  purchased, 
a  double  operation  was  put  through.  The  shares  bought  were  turned 
over,  with  $400,000  cash,  to  a  newly  formed  "  Georgia  Company," 
and  for  them  $4,000,000  in  5  per  cent  trust  bonds  and  $12,000,000 
in  Georgia  Company  stock  were  received  in  exchange.  And,  second, 
a  vigorous  campaign  was  entered  upon  to  secure  control  of  the 
Richmond  Terminal.  Sully  resigned  the  Terminal  presidency  in 
April.  For  his  vacant  place  the  Logan-Rice  people  offered  General 
Alexander  of  the  Central  of  Georgia,  and  the  Terminal  management 
supported  John  H.  Inman.  The  struggle  which  ensued  was  most  ex- 
traordinary. The  existing  board  of  directors  charged  the  Central 
group  with  trying  to  unload  their  Georgia  Company's  stock  upon 
the  Terminal  system ;  and  the  Logan-Rice  party  insinuated  that  the 
purchase  of  the  East  Tennessee  Railroad  had  been  the  occasion 
of  fraudulent  profits  to  the  Terminal  directors.1 

1  The  following  is  representative  from  a  pamphlet  issued  by  the  Rice  Committee : 

"The  matter  of  the  purchase  of  sixty-five  thousand  shares  of  the  first  preferred 
stock  of  the  East  Tennessee  Railroad  Company  and  the  circumstances  attendant 
thereon. 

"  ist.  Why  did  the  directors  of  the  Terminal  Company  purchase  sixty-five  thousand 
shares  of  that  stock  at  par,  when  fifty-five  thousand  and  one  shares  would  have  been 
sufficient  to  have  given  the  Terminal  Company  a  majority  of  that  stock,  the  minority 
stock  at  that  time  selling  at  about  eighty? 

"  2d.  Why  was  the  minority  stock  of  the  Danville  Railroad  Company  purchased 
at  the  same  time  at  a  price  which  then  amounted  to  about  two  hundred  dollars 
per  share,  being  a  premium  of  one  hundred  per  cent  ? 

"  3d.  Is  it  true  that  the  majority  of  the  committee  appointed  for  the  purpose  of 


THE  SOUTHERN  165 

"We  understand,"  declared  the  directors,  "that  a  majority  of 
the  names  thus  far  proposed  by  the  parties  soliciting  proxies  to  be 
cast  for  directors  and  president  of  this  company  are  gentlemen 
who  are  well  known  to  be  the  owners  of  a  majority  of  the  stock  of 
the  Georgia  Company,  which  owns  railroads  whose  business  and 
interests  are  at  all  points  of  our  system  in  competition  with  and 
antagonistic  to  the  business  and  interests  of  this  Company;  any 
diversion  of  traffic,  or  exercise  of  influence  favorable  to  the  Georgia 
Company  at  the  numerous  competitive  points  would  work  in  cal- 
culable injury  to  your  prosperity.  ...  If  on  the  other  hand  the 
preponderance  of  the  Georgia  Company's  interest  in  this  Company 
should  result  in  a  sale  to  and  purchase  by  your  Company  of  the 
Georgia  Company  stock  owned  by  these  gentlemen,  it  would  neces- 
sitate the  issue  of  many  millions  of  your  common  stock,  or  some 
kind  of  obligation  taking  precedence  of  that  stock,  the  effect  of 
which  upon  the  value  of  your  property  you  are  fully  competent  to 
judge."  l 

The  general  election  of  the  Terminal  was  held  on  May  31,  and 
Mr.  Inman  was  elected  president  for  the  remainder  of  the  unex- 
pired  term.2  The  Rice  party  was  apparently  overwhelmingly  de- 
feated. In  reality  its  activity  and  the  presence  of  its  friends  in  the 
councils  of  the  victors  resulted  in  the  successful  sale  of  the  Georgia 
Company  securities.  In  October,  1888,  little  over  five  months  after 
the  directors'  circular  of  April  6,  the  Richmond  Terminal  took  over 
the  Georgia  Company  stock  at  $35  a  share  and  allowed  its  owners 
to  withdraw  successfully  from  their  speculation.  Subsequently  it 
also  took  the  Georgia  Company  bonds  from  the  bankers  who  had 
purchased  them.3  This  left  Inman,  Hollins,  and  the  rest  a  profit  of 
$60  a  share  on  their  original  investment.  It  meant  for  the  Richmond 
Terminal  a  direct  annual  loss  which  there  was  very  little  prospect 

negotiating  the  purchase  of  the  stock  of  the  East  Tennessee  Company  consisted  of 
directors  of  the  Terminal  Company  largely  interested  in  the  minority  stock  of  the 
Danville  Company?"  Chron.  46:  579,  1888. 

1  Chron.  46:  449,  1888.  The  opposition  pamphlet  is  reprinted  in  Chron.  46:  579, 
1888.    It  contained  thirteen  heads,  each  of  which  charged  or  insinuated  fraud  on 
the  part  of  the  existing  board  of  directors. 

2  Chron.  46:  699,  1888.  The  vote  was  298,006  to  94,645.   For  resolutions  con- 
demning the  action  of  the  minority  see  Ry.  Rev.  28:  332,  1888. 

3  Chron.  47:  499,  1888. 


1 66  RAILROAD  REORGANIZATION 

of  making  good.  To  provide  for  the  $4,000,000  in  bonds  and  the 
120,000  shares  of  stock  acquired,  this  latter  issued  approximately 
$8,200,000  of  5  per  cent  collateral  bonds  bearing  an  annual  interest 
charge  of  $410,000.  Now  both  the  stock  and  the  $4,000,000  of 
bonds  were  a  lien  on  40,000  shares  of  Central  of  Georgia  stock  and 
depended  altogether  upon  the  dividends  declared  on  these  by  the 
Central  Company.  The  Central  never  paid  over  8  per  cent,  or  a  total 
of  $320,000  on  40,000  shares.  The  difference  between  this  and 
$410,000,  or  $90,000,  constituted  a  direct  loss  which  the  Terminal 
pledged  itself  to  meet  each  year.  If  the  victory  of  the  friends  of  the 
company  in  May  is  to  be  considered  a  genuine  one,  one  wonders 
what  price  the  owners  of  the  Georgia  Company  would  have  charged 
had  the  election  gone  the  other  way. 

With  the  Central  of  Georgia,  the  East  Tennessee,  and  the  Rich- 
mond &  Danville  under  its  control  the  Richmond  Terminal  could 
look  for  still  further  extension.  In  1890  it  acquired  control  of  the 
Erlanger  group  of  roads  from  Cincinnati  in  the  north  to  Chattanooga, 
thence  to  Meridian,  Mississippi,  thence  to  Vicksburg,  Mississippi, 
and  to  Shreveport,  Louisiana.  At  the  same  time  it  took  in  the  Louis- 
ville Southern,  which  joined  Louisville  with  the  Cincinnati  lines.1 
In  1888  the  Richmond  &  Danville  had  concluded  a  close  alliance 
with  the  Atlantic  Coast  Line,2  and  arrangements  had  been  made  for 
terminal  facilities  at  Norfolk.3  In  1889  it  leased  the  Georgia  Pacific, 
and  two  years  later,  when  this  road  reached  Arkansas  City,  it 
executed  a  traffic  agreement  with  the  Missouri  Pacific.4  In  1891  the 
Georgia  Pacific  leased  the  Central  Railroad  &  Banking  Company 

1  The  Erlanger  or  Queen    &  Crescent  system  comprised  the  following  roads: 
Cincinnati  Southern  (336  miles);  Vicksburg   &  Meridian  (142  miles);    Vicksburg, 
Shreveport  &  Pacific  (189  miles);  New  Orleans  &  Northwestern  (195  miles);  Ala- 
bama Great  Southern  (295  miles).    Total  mileage,  1157.    The  road  actually  acquired 
was  that  of  the  Cincinnati  Southern  and  Alabama  Great  Southern  between  Cincin- 
nati and  Meridian  (about  631  miles) ;  a  close  working  contract  being  concluded  with 
the  rest.   Ry.  Age,  15:  230,  1890.    The  East  Tennessee  made  payment  by  the  issue 
of  $6,000,000  5  per  cent    collateral  trust  bonds,  put  out  jointly  by  the  East  Ten- 
nessee and  Richmond  &  Danville  Companies  and  secured  by  deposit  of  the  shares 
purchased.     Chron.  50:  560,  1890.    For  a  monograph  on  the  Cincinnati  Southern 
Railway  the  reader  is  referred  to  a  study  by  J.  H.  Hollander  in  the  Johns  Hopkins 
University  Studies  for  January-February,  1894. 

2  Chron.  46:  828,  1888.  3  Ry.  Rev.  28:  386,  1888;  Ibid.  397,  1888. 
4  Ry.  Age,  16:  76,  1891. 


THE  SOUTHERN  167 

of  Georgia  for  ninety-nine  years  at  7  per  cent  on  its  capital  stock.1 
This  immensely  improved  the  connection  of  the  East  Tennessee 
with  the  North  and  West,  did  away  with  the  competition  of  a  parallel 
line,  and  afforded  another  outlet  upon  the  Mississippi. 

Here,  then,  was  the  Richmond  Terminal  system  in  1890.  Three 
great  north  and  south  lines :  one  from  Cincinnati  through  Birming- 
ham to  York,  over  the  Erlanger  system ;  one  from  Bristol  through 
Rome  to  Selma,  over  the  East  Tennessee,  Virginia  &  Georgia; 
and  one  from  Alexandria  and  West  Point  through  Danville,  Char- 
lotte, and  Atlanta  to  Montgomery.  One  of  these  took  business  from 
Indiana,  Illinois,  and  the  North  and  Central  West ;  one  from  Balti- 
more, Philadelphia,  and  the  East;  one  from  both  West  and  East; 
and  all  three  opened  upon  the  Gulf  over  the  Mobile  &  Birmingham 
to  Mobile.  In  addition,  three  parallel  east  and  west  lines:  from 
Chattanooga  to  Memphis,  from  Birmingham  to  Arkansas  City,  and 
from  Meridian  to  Shreveport  in  Alabama;  outlets  on  the  Atlantic 
coast  at  Charleston,  Port  Royal,  Savannah,  and  Brunswick;  and 
dominance  of  the  local  traffic  of  the  whole  territory  east  of  Alabama, 
south  of  Kentucky  and  Tennessee,  and  north  of  Florida.  It  was  by 
all  odds  the  leading  system  in  the  South.  It  had  a  mileage  of  8558.5 
as  compared  with  the  2383.4  of  the  Louisville  &  Nashville,  and 
gross  earnings,  exclusive  of  the  Erlanger  lines,  of  $41,361,095,  or 
more  than  twice  those  of  its  greatest  competitor. 

And  yet,  for  all  its  size,  the  Terminal  group  was  perilously  near 
collapse.  Its  physical  condition  was  poor  and  much  of  its  mileage 
was  unprofitable;  its  capitalization  was  tainted  with  dishonesty; 
and  the  legality  of  its  recent  combinations  had  not  been  tested  in  the 
courts.  Let  us  quote  from  the  results  of  an  examination  made  by 
a  well-known  banking  firm  three  years  later. 

"While  in  a  general  way  the  main  lines  of  the  Richmond  &  Dan- 
ville [West  Point  and  Alexandria  to  Atlanta],"  said  this  firm  in  its 
report,  uare  in  fair  condition  —  better  than  those  of  the  East 
Tennessee,  excepting  parts  of  its  main  line  between  Bristol  and 
Chattanooga,  the  Cincinnati,  New  Orleans  &  Texas  Pacific,  and 
the  Alabama  Great  Southern  —  nearly  all  the  rail  in  both  systems 
is  too  light  (50  to  60  Ibs.  while  on  the  main  lines  it  should  be  70  to  75 
Ibs.),  many  of  the  trestles  need  renewing,  and  a  large  number  of  the 

1  Chron.  52:  862,  1891. 


1 68  RAILROAD  REORGANIZATION 

bridges,  principally  on  the  East  Tennessee  system,  are  not  suffi- 
ciently strong  to  warrant  the  use  of  heavy  engines,  which  are  essen- 
tial to  hauling  long  trains  and  operating  with  economy.  To  a  very 
large  extent  ballast  is  altogether  lacking  or  insufficient  in  quantity. 
Excepting  that  portion  of  the  equipment  represented  by  equipment 
bonds  or  notes,  the  engines  and  cars  are  generally  small  and  weak 
and  unsuitable  for  main -line  service,  and  are  also  insufficient  in 
quantity  for  any  considerable  enlargement  of  business.  Other  ap- 
pointments, such  as  shops,  yards,  etc.,  are,  with  but  few  exceptions, 
crude  and  uneconomical. 

"On  the  branches  and  secondary  lines,  especially  those  of  the 
Richmond  &  Danville  system,  the  condition  is  even  worse,  little  or 
no  effort  having  been  made  to  maintain  them  at  proper  standard, 
even  for  a  moderate  traffic.  About  700  miles  of  the  Richmond  & 
Danville  secondary  lines  and  branches  (including  about  200  miles 
of  narrow-gauge  lines)  are  still  laid  with  iron  rails.  On  July  ist, 

1892,  there  were  72  miles  of  iron  rails  in  the  main  lines  of  the  East 
Tenn  essee. 

"An  expenditure  of  several  million  dollars  should  be  promptly 
made  on  these  properties  for  equipment  alone,  but  it  is  no  use  to  do 
so,  even  if  it  were  possible,  unless  additional  track  and  yard  facil- 
ities are  also  provided,  nor  unless  such  enlargements  of  engine  and 
car  shops  be  made  as  will  permit  of  the  equipment  being  kept  in 
order."  ' 

This  verdict  was  only  reinforced  by  the  characterization  in  detail 
of  a  number  of  the  subsidiary  lines.  Thus  the  Columbia  &  Green- 
ville was  termed  "a  collection  of  weak  lines  of  constantly  decreasing 
value";  the  Mobile  &  Birmingham  "of  no  value  whatever  to  the 
East  Tennessee";  and  the  Memphis  &  Charleston  "valuable,  but 
in  a  condition  totally  unsuited  to  modern  requirements."  How  the 
capitalization  of  the  system  was  tainted  with  fraud  has  already  been 
pointed  out.  The  legality  of  the  recent  combinations  had  not  been 
tested  in  the  courts.  In  January,  1889,  counsel  for  certain  unnamed 
parties  had  a  plea  for  a  quo  warranto  presented  to  the  Attorney- 
General  of  Virginia.2  The  petition  alleged  that  the  purchase  of  the 

1  From  the  reorganization  plan  prepared  by  Drexel,  Morgan  &  Co.,  dated  May  i, 

1893.  Chron.  56:  874  ff.,  1893. 

2  Ry.  Age,  14:  78,  1889. 


THE  SOUTHERN  169 

control  of  the  East  Tennessee,  Virginia  &  Georgia  Railway  and  of 
the  Virginia  Midland  was  an  abuse  of  the  powers  of  the  Richmond 
&  West  Point  Terminal  ...  a  violation  of  public  policy,  and  an 
usurpation  to  the  great  damage  and  prejudice  of  the  constitution 
and  laws  of  Virginia.  This  petition  the  Attorney- General  dismissed 
on  technical  grounds.  The  legality  of  the  various  mergers  was  soon, 
however,  to  be  attacked  again,  and  in  1889  the  question  was  de- 
cidedly unsettled.1 

The  storm  broke  in  August,  1891.  On  the  eighth  of  that  month 
the  New  York  Herald  published  a  vigorous  onslaught  upon  the 
company.  It  maintained  that  the  Richmond  &  Danville  system 
had  failed  to  earn  its  fixed  charges  by  $526,560  in  the  year  ending 
1890;  that  this  fact  had  been  concealed  by  deceptive  or  false  entries 
on  the  books  which  made  a  fictitious  profit  emerge  by  covering  up 
the  losses  on  auxiliary  lines;  that  the  8  per  cent  dividends  which 
had  been  paid  on  the  Central  of  Georgia  had  not  of  late  years  been 
earned,  and  that  the  price  paid  for  the  Georgia  Central  stock  had 
been  grossly  excessive;  that  the  East  Tennessee  was  just  about 
paying  its  way  ;  and,  finally,  that  the  other  recent  acquisitions  were 
either  just  paying  their  way  or  were  showing  annual  deficits.2  Color 
was  given  to  the  charges  by  the  trouble  caused  by  the  floating  debt. 
Though  denied  by  the  officials  of  the  company,  the  sale  of  2000 
shares  of  Baltimore  &  Ohio  stock  held  in  the  Terminal  treasury ;  3 
the  negotiation  of  a  short  time  loan  at  6  per  cent  and  2\  per  cent 
commission  for  the  Central  of  Georgia  and  the  extension  of  another 

1  The  failure  of  this  initial  suit  encouraged  the  Richmond  Terminal  to  take  steps 
to  make  its  position  more  secure.    In  February,  1889,  a  collateral  trust  mortgage 
of  $24,300,000  was  announced,  intended  not  only  to  pay  off  the  floating  debt  and 
several  classes  of  bonds,  but  also  to  purchase  the  balance  of  common  stock  of  the 
Central  of  Georgia  and  Richmond   &  Danville  and  of  the  first  preferred  stock  of 
East  Tennessee  outstanding.    See  Poor's  Manual  for   1890;  also  Chron.  48:  764, 
1889.   Subsequently  the  company  issued  common  shares  of  its  own  instead  of  bonds 
in  exchange  for  the  East  Tennessee  first  preferred,  and  succeeded  in  securing  nearly 
$2,000,000  of  the  outstanding  issue.    Chron.  49:  374,  1889.    The  rate  of  exchange 
was  3i  to  i.  The  Richmond  &  Danville  shares  were  retired  by  new  collateral  bonds 
at  85,  plus  $26  per  share  in  cash,  and  in  connection  with  the  operation  more  stock 
and  $5,700,000  collateral  bonds  were  sold  on  favorable  terms  to  stockholders  to 
provide  for  the  floating  debt. 

2  For  replies  by  Alexander  and  Inman,  see  New  York  Herald,  August  10,  1891, 
and  Chron.  53:  224,  1891. 

3  At  97$.    See  R.  R.  Gaz.  23:  718,  1891. 


170  RAILROAD  REORGANIZATION 

loan ; l  the  placing  of  $500,000  at  6  per  cent  for  the  Richmond  & 
Danville;  and  the  active  financial  support  which  General  Thomas 
felt  obliged  to  render  the  East  Tennessee  showed  the  anxiety  which 
it  occasioned. 

On  November  25  the  directors  held  a  meeting  and  appointed 
Messrs.  Eckstein  Norton,  late  president  of  the  Louisville  &  Nash- 
ville; Wm.  Solomon,  of  Speyer  &  Co.;  Jacob  H.  Schiff,  of  Kuhn, 
Loeb  &  Co. ;  Chas.  S.  Fairchild,  president  of  the  New  York  Security 
&  Trust  Company;  and  Louis  Fitzgerald,  president  of  the  Mercan- 
tile Trust  Company,  a  committee  to  carefully  inquire  into  and  ex- 
amine the  condition  of  the  Terminal  properties  and  to  aid  the  com- 
pany in  perfecting  a  plan  of  readjustment.  Owing  to  the  financial 
depression,  they  explained,  "the  company  has  been  unable  to  sell 
securities  based  upon  engagements  they  had  made  prior  to  the  period 
of  depression  and  to  pay  for  necessary  equipment  and  improvements. 
A  large  floating  debt  has  in  this  way  been  accumulated,  but  each  of 
our  important  railroad  systems  is  solvent.  .  .  .  After  maturely 
considering  the  whole  situation,  we  felt  it  wise  to  invite  the  gentle- 
men whose  names  appear  ...  to  aid  us  in  perfecting  the  best  plan 
for  a  permanent  adjustment  of  our  affairs."  2 

The  committee  reported  provisionally  on  December  8.  It  then 
stated  that  it  was  essential  to  the  proposed  plan  of  relief  that  the 
elections  of  all^  the  subordinate  companies  in  the  Richmond  Term- 
inal system  should  be  postponed  till  after  the  Richmond  Terminal 
affairs  were  settled,  and  requested  that  financial  provision  be  made 
for  the  employment  of  an  expert  or  experts  in  the  examination  of  the 
properties  and  accounts.  It  was  understood  that  the  committee's 
plan  was  to  make  a  considerable  assessment  on  the  stockholders. 
The  board  of  directors  refused  to  respond  and  the  committee  there- 
fore withdrew.3 

1  Chron.  53:  674,  1891. 

2  R.  R.  Gaz.  23:870,  1891.   The  composition  of  this  committee  was  severely  criti- 
cised, partly  on  the  ground  of  the  relations  of  Norton  and  Schiff  to  the  Louisville 
&  Nashville  and  to  the  Norfolk  &  Western  respectively,  and  partly  on  the  ground 
that  the  other  members  were  creditors  only  and  had  no  interest  other  than  the  repay- 
ment of  their  loans.    It  would  seem,  however,  that  the  property  was  likely  to  have 
fared  better  in  the  hands  of  reputable  New  York  bankers  than  in  the  hands  in  which 
it  had  formerly  reposed. 

3  Chron.  53:  922,  1891. 


THE  SOUTHERN  171 

The  next  day  the  stockholders  selected  Mr.  F.  P.  Olcott  to  ap- 
point a  new  committee  to  take  up  the  work.1  They  were  not  hi 
favor  of  radical  action,  and  Mr.  Olcott  expressed  the  opinion  that 
there  was  no  necessity  for  measures  so  stringent  as  those  which  the 
Schiff- Norton  Committee  had  had  in  mind.  It  was  but  natural  that 
at  this  point  there  should  have  been  some  delay.  Meetings  were  held, 
expedients  for  raising  cash  discussed,  and  a  reorganization  plan  was 
gradually  whipped  into  shape.  It  was  not,  therefore,  until  March 
19,  1892,  that  the  public  were  informed  what  Mr.  Olcott  and  his 
backers  did  consider  that  the  situation  required.  The  main  points 
of  the  elaborate  scheme  which  was  then  proposed  were  as  follows : 

First,  a  consolidation  of  the  Richmond  Terminal,  Richmond  & 
Danville,  and  East  Tennessee  properties.  The  Central  of  Georgia 
and  the  Erlanger  systems  were  not  to  be  included  in  the  reorganiza- 
tion, but  the  interest  of  the  Richmond  Terminal  and  the  East 
Tennessee  in  their  stock  was  to  be  made  subject  to  a  new  mortgage. 

Second,  a  reduction  in  fixed  charges. 

Third,  the  sale  of  securities  to  pay  off  the  floating  debt. 

Consolidation  of  properties  was  found  advisable  for  several 
reasons.  "  While  some  of  the  companies  show  a  surplus  of  earnings," 
said  the  committee,  "in  many  instances  it  has  been  impossible  to 
apply  such  surplus  earnings  to  make  up  deficiencies  arising  from 
the  operations  of  other  companies.  The  committee  finds  that  the 
various  systems  have  not  been  operated  throughout  for  the  common 
benefit  of  the  controlling  interest,  but  that  they  have  competed 
among  themselves  for  business,  each  system  maintaining  separate 
organizations  for  obtaining  business.  ...  In  the  judgment  of  the 
committee  the  only  adequate  remedy  which  can  be  adopted  is  to 
unite  the  several  corporations,  as  far  as  practicable,  hi  one  system 
under  one  management,  and  to  consolidate  their  obligations." 

In  order  to  unify  the  system  the  committee  proposed  three  great 
issues  of  new  securities  as  follows : 

$170,000,000  four  per  cent  first  mortgage  35-year  gold  bonds,  to 
be  issued  by  a  new  corporation  representing  the  consolidation  of  the 

1  Chron.  53:  969,  1891.  The  members  were:  F.  P.  Olcott;  Col.  Oliver  H.  Payne; 
F.  D.  Tappan,  president  of  the  Gallatin  National  Bank;  W.  H.  Perkins,  president 
of  the  Bank  of  America;  and  Henry  Budge,  of  Hallgarten  &  Co.  These  gen- 
tlemen appointed  Messrs.  Olcott,  Budge,  and  Perkins  a  sub-committee  to  prepare 
a  plan.  Ry.  Rev.  32:  14,  1892. 


172  RAILROAD  REORGANIZATION 

Richmond   &  Danville  Railroad  Company  and  the  Richmond   & 
West  Point  Terminal  Railway   &  Warehouse  Company. 

$70,000,000  five  per  cent  non-cumulative  preferred  stock. 

$110,000,000  common  stock. 

In  general,  the  new  bonds  were  to  exchange  for  old  bonds  and  the 
new  common  stock  for  old  common  and  preferred,  while  the  new 
preferred  stock  was  to  be  joined  in  varying  proportions  with  each 
of  the  other  issues  to  make  the  exchanges  look  attractive.  Thus, 
for  the  Richmond  &  Danville  consolidated  6s  were  offered  120  per 
cent  in  new  bonds  and  45  per  cent  in  new  preferred ;  for  the  East 
Tennessee  first  mortgage  73  120  per  cent  in  new  bonds  and  45  per 
cent  in  new  preferred  stock ;  for  the  Richmond  Terminal  common 
stock  100  per  cent  in  new  common  and  50  per  cent  in  new  preferred. 
This  arrangement  was  not  rigidly  adhered  to.  Some  of  the  poorer 
of  the  outstanding  stocks  received  new  common  only,  and  the 
Richmond  Terminal  preferred  was  given  par  in  new  bonds  besides 
a  bonus  hi  preferred.  These  were,  however,  exceptions.  The  prin- 
ciple which  determined  the  various  ratios  of  exchange  is  more  diffi- 
cult to  discover.  It  was  not  that  of  equivalence  of  return.  The  plan 
did  not  attempt  to  allow  to  each  holder  a  chance  at  the  same  receipts 
which  he  had  formerly  enjoyed  while  reducing  the  amount  which 
he  could  demand,  but  gave  sometimes  more  than  this  and  sometimes 
less.  And  the  variations  from  what  might  be  called  a  normal  ratio 
did  not  always  correspond  with  the  relative  security  of  different 
issues  as  indicated  by  their  market  quotations.  For  instance,  the 
East  Tennessee  first  75  sold  in  December,  1891,  at  113^  and  the 
Richmond  Terminal  collateral  6s  at  83;  yet  the  former  received 
120  per  cent  and  35  per  cent  and  the  latter  120  per  cent  and  40  per 
cent  in  new  bonds  and  preferred  stock  respectively.  Again,  the 
Atlanta  &  Charlotte  first  73  sold  in  October,  1891,  at  n8J  and 
received  under  the  plan  120  per  cent  in  bonds  and  40  per  cent  in 
preferred  stock;  the  Richmond  &  Danville  consolidated  6s  sold 
at  109  and  received  120  per  cent  and  45  per  cent.  It  is  clear  that  the 
committee  desired  to  reduce  the  interest  which  the  various  classes 
of  bonds  should  have  a  right  to  demand,  and  that  it  expected  to 
make  compensation  by  means  of  preferred  stock  on  which  pay- 
ments should  be  made  if  earned.  So  much  of  its  scheme  was  com- 
mendable. On  the  other  hand,  the  rates  of  exchange  of  old  secur- 


THE  SOUTHERN  173 

ities  for  new  were  in  many  cases  ill-advised.  The  reduction  in 
fixed  charges  was  to  be  $1,819,837,  although  by  the  exchanges  alone 
the  capitalization  was  to  be  increased  by  over  $50,000,000.  The 
charges  on  the  system  had  amounted  in  1891  to  $9,474,83 7. l  Net 
earnings  had  been  $8,744,736.  Fixed  charges  under  the  plan  were 
to  amount  to  $7,666,000.  As  a  matter  of  fact  they  would  have 
been  greater  than  this,  for  some  of  the  old  bonds  would  have  re- 
mained outstanding,  and  the  estimate  did  not  include  interest  on 
any  bonds  issued  for  improvements.  The  floating  debt  was  to  be 
retired  by  the  sale  of  new  securities,  namely,  $18,235,800  new  first 
mortgage  bonds  and  $6,382,530  preferred  stock.  These  were  to 
net  $14,588,640,  or  sufficient  to  cancel  a  debt  of  $6,310,000  and 
car  trusts  of  $2,369,564  and  to  provide  a  balance  for  miscellaneous 
uses.  A  syndicate  guaranteed  the  sale,  but  holders  of  stock  or  of 
collateral  trust  5  per  cent  bonds  were  to  be  allowed  to  subscribe 
up  to  1 6  per  cent  of  their  holdings  at  the  rate  of  $800  for  one  new 
mortgage  bond  and  $350  in  new  stock.  New  bonds  to  a  maximum 
of  $10,000,000  were  to  be  issued  only  for  the  acquisition  of  additional 
property,  while  beyond  this  the  vote  of  a  majority  of  preferred  stock 
was  to  be  required  to  authorize  any  additional  mortgage  on  pro- 
perty covered  by  the  first  mortgage.2 

Such  was  the  plan  laid  before  securityholders.  It  proposed  a 
considerable  reduction  in  fixed  charges,  though  probably  not  enough 
to  put  the  company  out  of  danger,  and  a  large  increase  in  new  se- 
curities. It  failed  because  it  imposed  losses  upon  the  wTong  parties. 
As  between  the  various  classes  of  bonds  its  terms  were  frequently 
inequitable.  As  between  the  bonds  and  the  stock  it  altogether 
favored  the  latter.  It  levied  no  assessment,  it  compelled  no  sub- 
scription to  new  securities,  and  in  three  cases  only  did  it  announce 
an  intention  of  reducing  the  nominal  value  of  the  stockholders' 
holdings.3  The  original  time  limit  for  deposits  was  set  at  April  14, 

1  This  excluded  the  Central  of  Georgia  and  the  Alabama  Great  Southern.   The 
figure  was  based  on  existing  bonded  debt,  floating  debt,  and  rentals.    It  included 
car  trust  payments,  but  excluded  taxes,  which  were  included  in  operating  expenses, 
and  excluded  also  the  interest  on  securities  owned  by  the  system  or  the  various 
corporations  composing  the  system. 

2  The  plan  in  full  is  reprinted  in  Chron.  54:  487,  1892. 

3  Consider  for  instance  the  treatment  of  the  Richmond  Terminal  preferred  stock. 
This  was  quoted  in  December,  1891,  as  low  as  45.    The  plan  accorded  it  100  per 


174  RAILROAD  REORGANIZATION 

1892.  This  was  subsequently  extended,  but  without  effect,  and  on 
May  1 6  the  Olcott  Committee  announced  that  the  plan  had  failed.1 

The  collapse  of  this  attempt  at  readjustment  was  a  blow  to  those 
who  had  hoped  for  a  speedy  and  amicable  reorganization  of  the 
Richmond  Terminal  system.  On  the  same  day  that  failure  was 
confessed  the  stockholders  met  and  appointed  Messrs.  W.  E.  Strong, 
Samuel  Thomas,  and  W.  P.  Clyde  a  committee  to  confer  with  the 
Olcott  Committee  to  ascertain  what  had  best  be  done.  A  week  later 
General  Thomas  reported  a  plan  for  the  reorganization  of  the 
Richmond  &  Danville  alone.  The  Richmond  Terminal  Company, 
he  said,  should  be  wound  up  and  be  succeeded  by  a  new  company 
with  $43,000,000  of  preferred  stock  and  $70,000,000  of  common. 
The  present  6  per  cent  bonds  should  be  given  1 70  in  new  preferred 
stock ;  the  present  5  per  cent  bonds  and  preferred  stock  par  hi  new 
preferred  stock;  and  the  present  common  should  receive  par  in  new 
common  and  be  compelled  to  subscribe  for  $8,000,000  collateral 
trust  two-year  6  per  cent  notes  at  92 J.2  This  amounted  to  an  assess- 
ment of  10  per  cent  upon  the  common.  It  was  not  proposed  to  pay 
off  the  floating  debt  with  the  proceeds  of  this  assessment,  but  to 
buy  the  claims  held  by  bankers,  and,  if  necessary,  foreclose  these 
claims  and  take  possession  for  the  stockholders.  If  the  full  amount 
should  not  be  subscribed  by  the  stockholders  the  preferred  stock 
was  to  have  the  right  to  make  subscription  for  the  balance,  and  to 
take  the  securities  that  would  have  gone  to  the  non-paying  common 
stock ;  and  the  common  stock  not  subscribing  was  to  have  no  rights 
to  the  common  stock  of  the  new  company.3 

That  this  scheme  was  much  more  radical  as  well  as  more  limited 
than  the  Olcott  plan  appears  upon  its  face.  No  serious  attempt  was 

cent  in  new  bonds  and  20  per  cent  in  new  preferred  stock.  Per  contra,  the  Richmond 
&  Danville  consolidated  53  were  quoted  the  same  months  at  75  and  received  100 
per  cent  in  new  bonds  and  40  per  cent  in  new  preferred.  Was  it  any  wonder  that 
the  holders  of  prior  liens  refused  to  come  in? 

1  Chron.  54:  846,  1892. 

2  These  notes  were  to  be  secured  by  the  same  securities  that  were  then  pledged 
to  secure  the  floating  debt  and  were  to  be  exchanged  for  $170  in  new  preferred 
stock  if  the  plan  should  prove  successful. 

3  Ry.  Age,  17:  414,  1892.    It  was  not  proposed  to  retain  control  of  the  Central 
of  Georgia,  but  instead  certificates  of  aliquot  parts  in  the  holdings  of  the  Georgia 
stocks  were  to  be  issued  to  each  stockholder,  making  him  the  actual  owner  of  his 
proportionate  share. 


THE  SOUTHERN  175 

made  to  carry  it  into  effect.  On  suggestion  of  General  Thomas  the 
stockholders'  meeting  voted  that  a  consulting  committee  of  fifteen 
be  appointed  by  the  chair  to  confer  with  the  committee  of  three,  and 
then  adjourned  subject  to  call.1  The  enlarged  committee  found 
that  application  had  been  already  made  to  Messrs  Drexel,  Morgan 
&  Co.  by  a  number  of  prominent  banking  firms,  asking  that  they 
enter  upon  the  work  of  reorganization.  It  therefore  dropped  the 
Thomas  plan  and  joined  in  the  petition.  Drexel,  Morgan  &  Co. 
on  their  part  agreed  to  undertake  an  examination  of  the  Terminal 
property,2  but  four  weeks  later  replied  that  while  in  their  opinion 
a  reorganization  was  feasible,  the  lack  of  assurance  of  support  from 
Mr.  Clyde  made  them  unwilling  to  undertake  the  task.3 

At  this  point  efforts  at  reorganization  were  checked.  One  plan  had 
failed,  one  had  been  formulated  but  not  pushed  forward,  and  the 
task  of  creating  a  third  had  been  refused  by  the  banking  firm  which 
was  apparently  best  able  to  carry  a  plan  to  a  successful  conclusion. 
For  a  time  now  the  field  was  left  to  the  disputes  between  members 
of  the  Richmond  Terminal  family,  which  made  up  in  bitterness  for 
what  they  lacked  in  the  matter  of  valuable  result.  Mention  will  be 
made  only  of  the  wrangles  between  the  Central  of  Georgia  and  the 
other  parts  of  the  system. 

The  Central  of  Georgia  had  been  placed  under  a  receiver  of  its 

1  This  committee  was  subsequently  enlarged  and  became  known  as  the  "  Inde- 
pendent Committee  of  Seventeen." 

2  Chron.  54:  888,  1892. 

3  Ibid.  55 :  23,  1892.    On  July  6,  Chairman  Strong,  of  the  Advisory  Committee 
of  Seventeen,  appointed  Messrs.  George  F.  Stone,  J.  C.  Maben,and  W.  E.  Strong 
a  sub-committee  to  further  consider  reorganization.    Chron.  55:  59,  1892.    Subse- 
quently Mr.  Strong  appointed  Messrs.  Coppell,  Manson,  and  Plant  a  committee 
to  look  after  the  Terminal  55,  and  Messrs.  Bull,  Goadby,  and  Cyrus  J.  Lawrence 
a  committee  to  look  after  the  6s.    Mr.  Strong,  as  chairman  of  the  Advisory  Com- 
mittee, was  ex-officio  member  of  each.  The  first  of  August  Messrs.  Thompson  Dean, 
Albert  B.  Boardman,  and  Charles  P.  Huntington  were  appointed  a  committee  by 
the  holders  of  between  50,000  and  60,000  shares  of  stock  and  other  securities  of 
the  Richmond  Terminal  system,  "  for  the  purpose  of  removing  the  obstacles  which 
now  stand  in  the  way  of  a  fair  and  equitable  reorganization  of  the  Richmond   & 
West  Point  Terminal    Railway    &  Warehouse   Company  and  its  constituent  cor- 
porations, and  to  this  end  to  employ  attorneys  and  to  take  all  necessary  steps  to 
secure  the  appointment  of  permanent  receivers,  who  will  be  in  the  interest  of  no 
clique  or  faction  in  said  companies."    Chron.  55:  216,  1892.   See  in  this  connection 
Ry.  Rev.  32:521,  1892. 


176  RAILROAD  REORGANIZATION 

own  some  two  weeks  before  the  publication  of  the  Olcott  plan.  Some 
months  later  this  receivership  was  made  permanent,  and  the  Rich- 
mond Terminal  was  enjoined  from  voting  the  42,200  shares  of 
Central  stock  which  it  held.  It  can  scarcely  be  said  that  the  with- 
drawal of  the  Central  of  Georgia  from  the  Terminal  system  was 
unwelcome  to  the  latter.  Already  the  Richmond  &  Danville  had 
refused  to  carry  out  its  guarantee  on  the  Central's  stock  unless  that 
company  should  deposit  bonds  to  cover  an  alleged  sum  due  from  it,1 
and  President  Oakman  had  hastened  to  inform  General  Alexander, 
the  temporary  Central  receiver,  that  the  Richmond  &  Danville 
would  not  operate  the  Central  of  Georgia  after  the  end  of  the  tem- 
porary receivership.2  When,  however,  the  Central  not  only  insisted 
on  withdrawal,  but  asked  Judge  Speer,  of  the  District  Court  of 
Macon,  Georgia,  to  appoint  a  receiver  for  the  Richmond  &  Danville 
Railroad  on  the  ground  that  that  company  was  insolvent  and  was 
indebted  to  the  Central  in  the  sum  of  $2, 459,670, 3  prompt  action 
was  made  necessary.  Application  was  made  to  Judge  Bond  of  the 
Circuit  Court  for  the  Eastern  District  of  Virginia,  and  on  June  16 
this  magistrate  appointed  Messrs.  F.  W.  Huidekoper  and  Reuben 
Foster  receivers  of  the  Danville  road.4 

"This  appointment  of  receivers  by  Judge  Bond,"  explained  the 
parties  responsible,5  "  is  not  only  not  inimical  to  nor  in  opposition 
to  any  plan  for  the  financial  reorganization  and  rehabilitation  of  the 
Danville  system,  but  will  be  found  to  greatly  facilitate  and  aid  any 
plan  of  reorganization,  while  if  the  Georgia  court  had  obtained  pos- 
session of  and  jurisdiction  over  the  Danville  system  this  would  have 
been  rendered  practically  impossible.  .  .  .  The  necessity  for  such 
action,"  they  continued,  with  a  touch  of  pathos,  "will  be  further 
appreciated  when  it  is  known  that  for  some  weeks  past  the  Richmond 
&  Danville  Company  has  not  been  able  to  keep  either  a  dollar  in 
bank  or  in  its  safes  within  the  state  of  Georgia,  because  every  such 
dollar  has  been  attached  or  garnished  by  parties  alleging  claims 

1  R.  R.  Gaz.  24:  33,  1892.   The  deposit  was  made  and  the  dividend  paid. 

2  Ibid.  24:  237,  1892.  3  Chron.  54:  965,  1892. 

4  It  will  be  observed  that  although  the  minority  stockholders  of  the  Central  of 
Georgia  objected  to  the  Terminal's  stock  control  they  were  not  averse  to  having 
the  precise  terms  of  the  lease  to  the  Georgia  Pacific  carried  out:  that  is,  to  being 
guaranteed  7  per  cent  upon  their  stock. 

8  W.  P.  Clyde,  etc. 


THE  SOUTHERN  177 

against  the  company,  and  even  the  money  sent  by  express  for  the 
liquidation  of  pay-rolls  has  been  attached  in  the  hands  of  the  express 
company,  and  in  every  instance  enormous  bonds  have  been  required 
to  release  such  moneys.  .  .  ."  l 

The  temporary  securing  of  their  position  by  the  receivership  al- 
lowed the  Danville  people  to  hit  back  at  the  Central  in  its  weakest 
point  —  the  details  of  the  sale  to  the  Terminal  of  the  Georgia  Cen- 
tral Company.  On  August  19  the  Advisory  Committee  of  Seventeen 
of  the  Terminal  securityholders  declared  that  the  investigations  of 
their  sub-committee  showed  that  certain  trustees  of  the  company, 
with  their  friends,  had  profited  to  the  extent  of  between  three  and 
four  million  dollars  in  this  operation.2  Toward  the  end  of  the  year 
tender  of  the  Georgia  Company  stock  and  bonds  was  made  back  to 
the  original  vendors  and  was  refused.3  In  December  suit  was  begun 
to  set  aside  the  purchase  on  the  ground  that  there  had  been  no  rati- 
fication sufficient  in  law  or  equity  to  bar  the  stockholders  from  can- 
celling the  transaction.  The  plaintiff  charged  that  "the  said  com- 
bination and  plan  so  formed  by  and  between  its  president  and  divers 
of  its  directors  [referring  to  the  purchase  of  the  Georgia  stock], 
confederating  with  the  other  syndicate  defendants  for  the  purpose  of 
selling  their  unsalable  and  discredited  securities  to  the  plaintiff  at 
such  prices  as  yielded  them  an  enormous  profit  and  necessarily 
imposed  on  plaintiff  a  heavy  yearly  loss,  was  contrary  to  equity  and 
good  conscience,  and  that  the  pretended  contract  dated  October  26, 
1888,  .  .  .  and  all  the  acts  done  in  pretended  purchase  of  the  stocks 
and  bonds  of  said  Georgia  Company  .  .  .  and  the  taking  from  the 
assets  and  money  of  the  plaintiff  of  over  $7,000,000  cash  ...  to  put 
into  the  pockets  of  the  said  faithless  directors,  the  syndicate  defend- 
ants, and  their  confederates,  were  all  acts  planned  .  .  .  and  per- 

1  Chron.  54:  1010,  1892.    Messrs.  Huidekoper  and  Foster  were  also  appointed 
receivers  by  courts  in  Virginia,  North  Carolina,  and  South  Carolina.   For  reply  by 
President  and  Receiver  Comer,  of  the  Central,  to  Clyde's  statement,  see  Chron.  55: 

22,    1892. 

2  Ry.  Rev.  32:  549,  1892.    The  committee  also  stated  that  the  Terminal  Com- 
pany had  been  made  to  purchase  $1,800,000  Georgia  state  bonds  at  par  and  inter- 
est, which  paid  only  3$  per  cent  a  year,  although  the  company  was  unable  to  bor- 
row money  at  less  than  6  per  cent ;  that  the  drafts  of  the  directors  to  a  large  amount 
were  paid  by  the  company,  and  that  no  vouchers  were  on  file  to  show  how  this 
money  was  expended. 

3  Chron.  55 :  938,  1892. 


178  RAILROAD  REORGANIZATION 

formed  by  said  Inman,  or  under  his  direction,  in  the  execution  of 
such  original  fraudulent  scheme,  combination,  purpose,  and  con- 
federacy. ..."  And  so  the  plaintiff  prayed  the  court  to  decree  the 
contract  of  purchase  void.1 

These  accusations  and  counter-accusations,  justified  though  many 
of  them  were,  had  little  direct  bearing  on  reorganization.  In  this 
progress  had  completely  ceased.  At  the  same  time  some  progress 
was  urgently  required.  The  Richmond  Terminal,  the  Richmond  & 
Danville,  and  the  Central  of  Georgia  were  in  the  hands  each  of  a 
different  set  of  receivers,  unpaid  interest  was  piling  up,  and  the  year 
1893  was  to  show  a  marked  decline  in  earnings.  Necessity  and 
mutual  distrust  dictated  a  second  appeal  to  Drexel,  Morgan  &  Co. 
to  undertake  the  rehabilitation  of  the  property.  On  February  2, 
1893,  the  following  letter  was  addressed  to  the^  firm  in  question: 

Messrs.  Drexel,  Morgan  &  Co., 

Gentlemen :  Since  the  time  you  were  previously  requested  to  take 
up  the  reorganization  of  the  Richmond  Terminal  system  much  time 
and  thought  have  been  devoted  to  its  affairs,  and  we  realize  that 
adverse  financial  conditions  and  also  the  present  general  distrust 
of  all  plans  for  the  restoration  of  this  system  require  that,  to  be  suc- 
cessful, its  reorganization  must  be  undertaken  by  parties  possessing 
the  confidence  of  both  the  securityholders  and  the  public,  and  also 
the  financial  strength  sufficient  for  its  accomplishment.  We  there- 
fore ask  you  to  take  up  this  reorganization  of  the  Richmond  Ter- 
minal and  its  allied  properties,  each  pledging  you  our  personal  sup- 
port and  aid  in  full  confidence  that  the  securityholders  will  support 
us  in  this  request. 

We  appreciate  the  labor  and  responsibility  connected  with  this 
undertaking,  and  are  therefore  willing  to  do  all  hi  our  power  to  give 
you  full  control  of  the  reorganization,  as  suggested  in  your  letter 
of  June  28,2  and  to  advise  our  friends  and  the  securityholders 
generally  to  deposit  their  securities,  without  requiring  the  assurances 
customary  in  such  cases. 

Very  respectfully, 

WM.  P.  CLYDE, 
GEO.  F.  STONE, 
WM.  E.  STRONG, 
J.  C.  MABEN, 
THOMAS  F.  RYAN. 

1  Chron.  55:1078,  1892.    For  replies  of  defendants  see   Chron.  56:414,  1893, 
and  Ibid.  972,  1893. 

2  This  was  the  letter  finally  declining  to  undertake  the  reorganization  in  1892 
because  of  lack  of  assurances  of  support. 


THE  SOUTHERN  179 

This  letter  was  accompanied  by  a  letter  from  F.  P.  Olcott,  pre- 
sident of  the  Central  Trust  Company,  pledging  his  support.  Inas- 
much as  lack  of  the  assurances  contained  in  this  correspondence 
had  alone  prevented  Drexel,  Morgan  &  Co.  from  undertaking  the 
task  proposed  the  previous  year,  their  prompt  though  conditional 
acceptance  was  not  surprising.  A  definitive  engagement  to  attempt 
the  work  followed  on  April  12.*  The  enlistment  of  Drexel,  Morgan 
&  Co.  hi  the  reorganization  provoked  general  satisfaction.  Mr. 
Hollins,  of  the  Central  of  Georgia  reorganization  committee,  ex- 
pressed his  pleasure  in  having  responsible  parties  to  deal  with  not 
connected  with  any  past  differences.2  The  directors  of  the  Richmond 
Terminal  urged  all  classes  of  securityholders  to  deposit,  and  the 
Clyde  Committee  was  emphatic  in  its  recommendation.  It  was 
recognized  that  the  situation  was  the  most  favorable  which  could 
be  hoped  for.  No  group  of  Southern  railroad  financiers  seemed 
capable  of  producing  a  fair  reorganization  plan,  and  it  was  also 
probable  that  no  plan  from  such  a  source,  however  fair,  would 
have  received  a  sympathetic  welcome.  Drexel,  Morgan  &  Co.,  on 
the  other  hand,  were  both  capable  and  sure  of  a  hearing. 

There  was  remarkably  little  delay  in  making  public  the  Drexel  - 
Morgan  plan.  Less  than  three  weeks  after  their  final  acceptance 
of  responsibility,  though  about  three  months  after  the  correspond- 
ence of  February  2,  the  firm  published  a  comprehensive  plan,  to  the 
examination  of  which  the  next  few  pages  may  be  devoted.  The 
principles  of  this  plan  of  May  i,  1893,  were  simple,  and  were  clearly 
and  convincingly  set  forth.  The  property  to  be  considered  was 
to  be  that  of  the  Richmond  Terminal,  the  Richmond  &  Danville, 
and  the  East  Tennessee.  The  Central  of  Georgia  was  to  be  omitted. 
The  imperative  needs  of  these  properties  the  plan  declared  to  be 
two: 

First,  the  provision  of  a  large  sum  for  the  physical  improvement 
of  the  system ; 

Second,  the  reduction  of  fixed  charges  to  an  amount  which  the 
companies  could  earn.3 

1  The  correspondence  appears  in  full  in  Chron.  56:  207,  1893,  and  Ibid.  56:  622, 
1893. 

>  Ry.  Rev.  33:95,  1893. 

3  These  needs  had  already  been  emphasized  by  the  Olcott  plan. 


180  RAILROAD  REORGANIZATION 

The  physical  condition  of  the  above  roads  in  1893  was  extremely 
bad.  "One  obvious  trouble  .  .  .  is,"  said  the  plan,  "that  their 
maintenance  and  repairs  have  been  neglected.  Another  is  that, 
while  nearly  all  the  lines  in  the  United  States  have  been  steadily 
substituting  solid  roadbeds,  heavy  equipment,  and  other  modern 
facilities  for  the  light  and  ineffective  appliances  formerly  in  use, 
these  lines,  because  of  the  constant  drain  to  which  they  were  subject 
for  the  obligations  assumed,  and  from  the  necessities  of  the  Terminal 
Company  for  the  payment  to  it,  as  dividends,  of  every  available 
dollar  with  which  to  meet  its  own  obligations,  have  not  been  in  a 
financial  condition  to  keep  up  to  the  times  in  this  respect,  and  npw 
they  find  themselves  so  far  behind  as  to  be,  to  a  considerable  extent, 
unqualified  to  handle  business  with  economy,  or  to  compete  suc- 
cessfully with  other  lines."  1  The  financial  condition  was  little 
better.  The  absolute  fixed  charges  of  the  Richmond  Terminal, 
the  Richmond  &  Danville,  and  the  East  Tennessee  systems,  viz., 
interest  on  bonds  held  by  the  public,  rentals,  equipment  notes,  and 
sinking  funds,  and  interest  on  floating  debts,  receivers'  certificates, 
etc.,  the  plan  declared  to  amount  annually  to  about  $9,900,000.  The 
entire  net  earnings  for  the  fiscal  year  ending  June  30,  1893,  were 
estimated  at  $7,000,000.  The  result  was  a  deficit  for  the  year  of 
about  $2,90x5,000.  This  state  of  affairs  required  serious  sacrifices 
from  somebody.  The  Olcott  plan  had  illustrated  the  folly  of  laying 
the  burden  largely  on  well- secured  senior  bonds.  The  Drexel  plan 
proposed  to  demand  the  necessary  concessions  from  the  junior 
bonds  and  from  the  stock.  "About  $74,000,000  of  the  bonds  and 
guaranteed  stocks  of  the  Richmond  &  Danville  and  the  East 
Tennessee  systems  held  by  the  public,"  it  continued,  "  are  on 

1  Lack  of  space  forbids  a  full  statement  of  the  criticisms  which  the  Drexel  plan 
had  to  make  upon  the. physical  condition  and  financial  practice  of  the  Richmond 
Terminal  properties.  The  following  is  from  the  plan,  section  9:  "As  an  example 
of  the  manner  in  which  accounts  have  been  kept,  it  may  be  mentioned  that  in  the 
operating  expenses  of  the  entire  Richmond  &  Danville  system  only  $20,000  were 
charged  for  renewal  of  rails  in  the  fiscal  year  ending  June  30,  1890,  and  not  a  dol- 
lar in  the  fiscal  years  ending  June  30,  1891  and  1892,  respectively.  In  seven  months 
under  the  receivership  (July,  1892,  to  January,  1893,  inclusive)  about  $600  were 
charged.  Since  that  date,  it  is  understood,  about  $18,000  have  been -charged.  With 
these  exceptions  all  renewals  of  rails  were  charged  to  construction  accounts.  Re- 
newals, properly  to  be  included  in  operating  expenses,  would  be  at  least  $100,000 
to  $150,000  per  annum."  Other  instances,  almost  as  bad,  could  be  stated. 


THE  SOUTHERN  l8l 

properties  which  are  believed  for  the  most  part  to  afford  adequate 
security,  and  for  this  or  other  reasons  this  plan  has  not  sought  to 
disturb  them.  About  $50,000,000  (mostly  recent  issues)  are  junior 
liens,  inadequately  secured,  or  else  are  on  new  or  branch  lines  of 
uncertain  earning  capacity,  and  the  holders,  hi  self-preservation, 
must  make  such  reasonable  concessions  as  the  situation  necessitates, 
taking  compensation  therefor  in  preferred  or  common  stock  of 
the  new  company.  .  .  ." 

The  tools  of  the  reorganization  were  to  be  the  following  new 
issues : 

$140,000,000  first  consolidated  mortgage  and  collateral  trust 
ioo-year  5  per  cent  bonds,  secured  by  mortgage  and  pledge  of  all 
the  property  of  the  new  company.  This  total  might  be  subsequently 
increased  to  acquire  the  whole  or  part  of  the  Georgia  Central 
system,  or  to  acquire  the  ownership  of  the  Cincinnati  Southern 
Railway  or  any  other  line  as  a  substitute  therefor. 

$75,000,000  5  per  cent  non-cumulative  preferred  stock. 

$160,000,000  common  stock. 

"The  general  theory  of  adjustment  of  disturbed  bonds,"  said  the 
plan,  "is  to  substitute  for  them  the  new  5  per  cent  bonds  to  such 
an  extent  as  is  warranted  by  earnings  and  situtation  of  the  proper- 
ties covered  by  the  present  mortgages,  and  the  new  preferred  stock 
for  the  remainder  of  the  principal.  In  some  cases,  where  the  bonds 
are  on  properties  of  no  actual  and  little  prospective  earning  capacity, 
a  more  severe  reduction  is  necessary.  In  several  instances,  where 
the  bonds  are  on  properties  which  are  likely  to  improve  more  rapidly 
than  other  disturbed  parts  of  the  system,  this  fact  is  recognized,  and 
an  extra  allowance  is  made  hi  compensation.  Finally,  in  one  or 
two  cases,  where  the  bonds  are  on  properties  the  loss  of  which  would 
adversely  affect  the  rest  of  the  system,  a  proper  recognition  is  made 
of  this  fact."  In  practice  not  only  bonds  and  preferred  stock,  but 
preferred  and  common  stock,  or  even  common  stock  alone  were 
exchanged  for  old  securities  of  little  value. 

This  provided  for  old  securities  but  not  for  cash  requirements. 
To  raise  cash  three  devices  were  resorted  to,  all  of  which  bore  en- 
tirely on  the  junior  securityholders  or  on  the  stock.  The  most 
direct  was  the  levying  of  an  assessment.  Terminal  common  stock 
was  assessed  $12.50  per  share,  East  Tennessee  first  preferred  $3, 


1 82  RAILROAD  REORGANIZATION 

second  preferred  $6,  and  common  stock  $9;  new  preferred  stock 
being  in  each  case  given  in  return.  This  distribution  was  based  on 
the  idea  that  the  stockholders  of  each  railroad  should  provide  for 
its  floating  debt.  The  floating  debt  of  the  Richmond  &  Danville 
was  about  $7,000,000,  that  of  the  East  Tennessee  about  $3,000,000, 
and  that  of  the  Richmond  Terminal  about  $100,000.  But  since  the 
last  named  held  practically  all  of  the  Richmond  stock  and  a  consid- 
erable proportion  of  the  East  Tennessee,  its  stockholders  were  sad- 
dled with  a  total  of  $8,300,000  or  an  equivalent  of  $12.50  per  share, 
while  the  East  Tennessee  was  taxed  proportionately.  The  rest  of  the 
cash  requirements  were  covered  by  the  sale  of  $8,000,000  new  bonds 
at  85,  and  $33,333,000  new  common  stock  at  15.  Depositors  of  all 
classes  of  Terminal  securities  and  of  all  classes  of  readjusted  secur- 
ities of  the  other  systems  were  allowed  to  subscribe  to  the  extent 
of  $1000  in  a  new  bond  and  $4000  in  new  stock  trust  certificates 
for  each  $22,000  par  value  of  stocks  or  bonds  deposited.  The  bal- 
ance of  the  issues  was  looked  after  by  an  underwriting  syndicate.1 
Future  capital  requirements  were  provided  for  mainly  by  new 
bonds.  $35,383,000  in  new  5  per  cents  were  set  aside  to  be  used 
only  for  new  construction,  betterments,  purchase  of  rolling  stock, 
and  extensions  and  additions  to  the  system.  Not  over  $2,500,000 
of  these  were  to  be  used  in  any  one  calendar  year ;  except  that,  in 
addition  to  this  annual  appropriation,  a  total  of  $3,000,000  in  bonds 
might  be  specifically  appropriated  with  the  unanimous  consent  of 
the  stock  trustees,  for  the  building  of  branches  or  extensions,  if 
undertaken  within  three  years  after  the  creation  of  the  new  mort- 
gage. All  property  acquired  with  these  bonds  was  to  be  brought 
under  the  lien  of  the  new  mortgage.  $8,000,000  of  the  cash  raised 
by  assessment  and  sale  of  securities,  moreover,  were  to  be  available 

1  Total  cash  requirements,  as  estimated,  were : 

Floating  debt,  including  equipment  notes  $12,900,000 

New  construction  and  equipment  during  two  years  8,000,000 

Expenses  of  reorganization  and  contingencies  2,350,000 

$23,250,000 

To  be  provided  from: 

Assessments  on  Terminal  stock  $8,750,000 

Assessments  on  East  Tennessee  stocks  2,700,000 

Sale  of  $33,333,000  new  common  stock  5,000,000 

Sale  of  $8,000,000  new  bonds  6,800,000 

$23,250,000 


THE  SOUTHERN  183 

for  new  construction  and  equipment  on  the  Richmond  &  Danville 
and  the  East  Tennessee.  And,  finally,  there  was  provision  for  the 
limitation  of  new  bond  issues,  for  a  voting  trust  and  for  the  consolida- 
tion of  the  Terminal  system. 

"The  ultimate  object  of  the  reorganization,"  said  the  plan 
("excluding  the  Georgia  Central  Company  from  consideration),  is  to 
have  the  new  company  acquire,  so  far  as  practicable,  the  ownership 
of  the  Richmond  &  Danville  and  East  Tennessee  systems,  including 
the  various  securities  now  owned  by  the  Terminal  Company  .  .  . 
and  the  securities  pledged  for  the  Richmond  &  Danville  and  East 
Tennessee  floating  debt.  .  .  . 

"  Both  classes  of  stock  of  the  new  company  .  .  .  are  to  be  issued 
to  three  Stock  Trustees,  who  shall  be  appointed,  on  or  before  com- 
pletion of  reorganization,  by  Messrs.  Drexel,  Morgan  &  Co.  The 
stock  shall  be  held  by  the  Stock  Trustees  and  their  successors, 
jointly,  for  five  years,  and  for  such  further  period  (if  any)  as  shall 
elapse  before  the  preferred  stock  shall  have  paid  5  per  cent  cash 
dividend  in  one  year,  although  the  Stock  Trustees  may,  in  their  dis- 
cretion, deliver  the  stock  at  an  earlier  date.  .  .  . 

"No  additional  mortgage  shall  be  put  upon  the  property  to  be 
acquired  hereunder  by  the  new  company,  nor  shall  the  authorized 
amount  of  the  preferred  stock  be  increased  without  the  consent  in 
each  case  of  the  majority  in  amount  of  the  preferred  stockholders."1 

The  result  of  all  these  provisions  was  to  be  a  cancellation  of  the 
floating  debt,  a  reduction  in  fixed  charges,  and  a  decrease  in  mort- 
gage bonds ;  though  inevitably  also  an  increase  in  stock  outstanding. 
The  plan  proposed  to  disturb  $49,117,900  of  outstanding  bonds,  or, 
including  the  Richmond  Terminal  55  and  6s,  a  total  of  $65,617,900. 
But  the  new  bonds  which  it  offered  in  exchange  amounted  to 
$19,806,700  only.  On  the  other  hand  it  took  $111,819,550  in  stock 
from  the  hands  of  the  public,  and  offered  $165,559,514  new  stock  in 
the  course  of  the  exchanges.2  This  was  very  conservative,  since  the 
increase  in  total  capitalization  through  these  exchanges  was  less 
than  4^  per  cent ;  and  less  too  than  the  cash  assessment  for  which 
preferred  stock  was  allowed.  Somewhat  greater  increase  in  securities 

1  The  new  company  reserved  the  right  at  any  time  to  redeem  its  preferred  stock 
in  cash  at  par. 

2  Of  which  $104,303,894  for  stock  and  the  rest  for  bonds  outstanding. 


184  RAILROAD  REORGANIZATION 

appears  if  we  consider,  not  only  the  exchanges,  but  the  provisions 
of  the  plan  as  a  whole ;  for  here  we  must  include  $33,300,000  new 
common  stock  and  $8,000,000  new  bonds  issued  to  retire  in  part  the 
$12,900,000  of  floating  debt  and  for  other  purposes.  Even  so  the 
net  increase  was  only  6  per  cent.1  The  natural  result  was  a  consider- 
able reduction  in  fixed  charges.  The  absolute  fixed  charges  of  the 
system  in  1893  the  plan  stated  to  be  $9,900,000.  The  fixed  charges 
under  the  plan  were  to  be  $6,789,000.  This  was  certainly  a  step  in 
the  right  direction.  It  was  the  point,  nevertheless,  at  which  the  plan 
was  weakest.  The  clauses  which  have  been  outlined  made  abundant 
and  conservative  provision  for  cash  requirements;  and  the  sums 
which  they  allowed  for  future  development  were  not  on  their  face 
inadequate ;  but  the  reduction  in  fixed  charges  was  less  than  should 
have  been  ensured.  The  net  earnings  for  the  year  ending  June  30, 
1892,  were  $7,725,000,  and  those  for  1893  were  estimated  by  the 
plan  itself  as  not  likely  to  exceed  $7,000,000.  This  would  have  left 
$936,000  over  the  proposed  fixed  charges  in  1892  and  $211,000  in 
1893 :  —  or  a  surplus  of  some  3  per  cent  in  the  latter  year.  This  was 
altogether  insufficient.  It  not  only  put  out  of  the  question  dividends 
on  the  $200,000,000  of  stock,  but  it  precluded  the  partial  improve- 
ment of  the  road  from  earnings,  and  left  the  system  at  the  mercy  of 
the  slightest  decrease  in  the  annual  returns.  Compared  with  previ- 
ous fixed  charges  the  plan  proposed  noteworthy  reductions ;  com- 
pared with  the  earnings  of  the  lines  involved  it  did  not  go  far  enough.2 
The  reception  of  the  Drexel-Morgan  plan  was,  nevertheless, 
satisfactory.  Certain  concessions  were  made  to  various  classes  of 
bonds,  and  by  June  17,  over  95  per  cent  of  the  securityholders  had 
given  their  assent.3  Unfortunately  the  earnings  of  the  property  now 
steadily  decreased.  The  gross  receipts  of  the  Richmond  &  Danville 
proper  were  15  per  cent  less  in  1893  than  in  1892;  and  Terminal 
system  lines  which  had  earned  $6,100,000  in  1892  earned  $5,300,000 
in  1893,  and  promised  to  earn  some  $4,250,000  only  in  1894.  This 
decrease  was  common  to  the  country  at  large.  It  was  of  peculiar 

1  The  reorganization  plan  estimated  the   capitalization    under  its  provisions  at 
about  #20,000  per  mile  of  road  owned  and  controlled;  about  #10,000  preferred  stock 
per  mile  owned  and  controlled;  about  $25,000  common  stock  per  mile  owned  and 
controlled. 

2  The  plan  is  published  in  full  in  Chron.  56:  874,  1893. 

3  Ry.  Rev.  33:388,  1893. 


THE  SOUTHERN  185 

importance,  however,  in  emphasizing  the  weak  point  hi  the  Drexel 
plan.  From  January  i  to  July  i,  1893,  the  Terminal  floating  debt, 
exclusive  of  car  trusts,  increased  $2,600,000.  From  July  i  to  March  i 
it  increased  at  least  a  million  more.  The  reorganization  plan  had 
been  prepared  "on  the  assumption  that,  during  reorganization,  the 
receivers  of  the  various  properties  could  provide  for  the  interest 
charges  on  the  undisturbed  securities,  as  well  as  accumulate  a  sum 
sufficient  for  the  interest  accruing  on  the  'disturbed  securities'  as 
readjusted."  l  As  it  turned  out,  the  receivers  were  obliged  to  make 
many  defaults  among  the  undisturbed  securities,  and  saved  nothing 
for  the  disturbed.  Some  modification  of  the  published  plan  had 
perforce  to  be  arranged. 

These  modifications  were  detailed  in  a  pamphlet  dated  Febru- 
ary 20,  1894.  They  comprised  three  proposals: 

(1)  To  exclude  from  the  reorganization  certain  unprofitable  pro- 
perties which  had  previously  been  included.   Certain  alterations  had 
already  been  made  toward  this  end  hi  the  exclusion  of  the  Erlanger 
line,  the  Memphis  &  Charleston,  and  the  Mobile  &  Birmingham. 
Further  modification  was  to  exclude  the  Northeastern  Railroad  of 
Georgia,  the  Macon  &  Northern,  and  five  other  subsidiary  lines. 

(2)  To  fund  for  a  year  or  two  the  coupons  on  new  bonds  given 
for  certain  securities,  and  to  provide  hi  other  cases  that  the  new 
bonds  should  not  bear  interest  till  1895  or  1896. 

(3)  To  lighten  the  assessment  on  Richmond  Terminal  and  East 
Tennessee  common  stock,  and  to  allow  to  all  assessed  securities 
one -quarter  of  their  assessment  in  bonds  and  three-quarters  in 
preferred  stock  instead  of  all  in  preferred  stock. 

At  the  same  time  a  few  other  modifications  allowed  to  some  bonds 
a  more  liberal  grant  of  new  securities  than  they  had  obtained  in 
May.  It  was  hoped  by  these  means  to  raise  the  average  earning 
ability  of  the  system,  while  reducing  the  new  securities  to  be  issued.2 

1  Modified  reorganization  plan.    Chron.  58:  385,  1894.    Some  information  con- 
cerning traffic  conditions  in  the  South  in  1894  is  to  be  found  in  the  Eighth  Annual 
Report  of  the  Interstate  Commerce  Commission,  pp.  20-24. 

2  From  $140,000,000  5  per  cent  bonds,  $75,000,000  preferred  and  $160,000,000 
common   stock   to   $120,000,000    bonds,    $60,000,000   preferred   and   $125,000,000 
common  stock.   Since,  however,  some  of  the  poorer  properties  were  cut  off  and  the 
terms  granted  to  others  were  made  more  liberal,  the  smaller  absolute  amount  of 
new  securities  represented  a  greater  relative  increase  than  before. 


1 86  RAILROAD  REORGANIZATION 

The  temporary  funding  of  coupons  further  lightened  fixed  charges 
until  business  should  have  had  time  to  revive.  "Under  the  plan  as 
now  modified,"  stated  Drexel,  Morgan  &  Co.,  "and  assuming  that 
one-half  of  the  new  bonds  to  be  sold  are  used  in  1894  and  the  other 
half  in  1895,  the  fixed  charges  are  estimated  at  about 

$4,100,000  in  1894, 
4,700,000  in  1895, 
5,400,000  in  I896.1 

"The  depression  in  the  South  began  in  1890-91.  There  would 
appear  to  be  no  reason  why  in  a  comparatively  short  time  these 
properties  should  not  very  easily  earn,  gross,  as  much  as  and  more 
than  they  earned  in  that  fiscal  year,  viz.,  over  $21,000,000.  Oper- 
ated at  70  per  cent  .  .  .  there  would  remain,  say  $6,600,000  net 
against  an  interest  charge  of  $5,400,000."  l 

The  reduction  in  assessments  was  made  possible  by  the  decrease 
in  mileage.  Although  the  floating  debt  had  increased  $2,600,000 
from  January  i,  1893,  and  the  equipment  notes  recorded  were  greater 
by  $i, 048,000, 2  yet  the  debt  to  be  provided  for  by  the  modified 
plan  of  1894  was  estimated  at  only  $12,200,000.  Besides  this  the 
cash  to  be  reserved  for  new  construction  was  reduced  $3,000,000, 
and  the  surplus  for  expenses  and  contingencies  $1,380,000.  Assess- 
ments were  therefore  set  at  $10  a  share  on  Richmond  Terminal 
common  instead  of  $12.50;  $7.20  on  East  Tennessee  common  in- 
stead of  $9;  and  $3  and  $6  on  East  Tennessee  first  and  second 
preferred  as  before.  The  new  securities  to  be  sold  were  reduced  cor- 
respondingly to  $8,000,000  of  bonds  and  $25,000,000  of  common 
stock.  Finally,  the  bonds  to  provide  for  new  construction,  better- 
ments, and  additions  were  reduced  from  $35,383,000  to  about 
$19,000,000,  of  which  not  over  $2,000,000  (instead  of  $2,500,000) 
were  to  be  used  in  any  calendar  year.  Other  provisions  of  the 
earlier  plan  were  to  remain  unchanged. 

It  was  this  modified  plan  which  was  carried  to  a  successful  con- 
clusion. In  principle  it  did  not  mend  the  'weak  spot  in  its  predeces- 

1  The  actual  charges  in  1895  were  $4,195,000. 

2  "The  increase  in  car  trusts  is  due  to  the  existence  of  about  $1,200,000  of  such 
obligations  on  the  Richmond   &  Danville  system,  which,  up  to  the  date  oj  the  plan 
oj  reorganization,  had  not  been  entered  on  the  ledger  oj  either  the  Railway  Company 
or  its  Receivers,  although,  as  it  appears,  they  were  well  known."   Modified  reorgan- 
ization plan. 


THE  SOUTHERN  187 

sor  of  May.  That  plan  had  contemplated  a  surplus  of  $211,000  over 
fixed  charges  for  1893.  This  estimated  charges  at  $4,100,000  for 
1894  and  net  earnings  at  $4,250,000  on  a  somewhat  reduced  mileage. 
There  was  not  to  be  more  left  for  dividends  and  improvements  than 
there  had  been  before,  while  the  cash  and  bond  provisions  for  im- 
provements were  notably  reduced.  The  concession  of  bonds  to  stock- 
holders for  one-quarter  of  their  assessments  was  unsound  financier- 
ing, as  was,  on  the  whole,  the  funding  of  coupons  on  the  new 
mortgage  bonds.  The  success  which  the  modification  had,  never- 
theless, in  restoring  the  company  to  solvency,  was  due  to  the  im- 
provement in  earnings  which  soon  took  place.  The  original  plan  had 
based  its  calculations  on  the  first  year  of  depression ;  the  amended 
plan  kept  charges  down  till  three  years  had  elapsed.  By  that  time 
business  had  begun  to  mend,  and  all  danger  of  bankruptcy  was  past. 
Other  points  in  either  plan  leave  little  to  criticise. 

The  modifications  to  the  original  plan  were  issued  on  February  20, 
1894.  Over  75  per  cent  of  the  system  bonds  had  assented  by  March 
24.  At  one  foreclosure  sale  after  another  the  reorganization  com- 
mittee now  bought  in  the  portions  of  the  old  system  covered  by  the 
plan.  Suits  against  the  Richmond  Terminal  had  been  brought  under 
the  two  collateral  mortgages,  and  on  July  13,  1893,  the  reorganiza- 
tion committee  bid  in  the  pledged  securities.  On  February  6,  1894, 
it  bought  the  remaining  assets  of  the  Terminal  Company;  on 
June  15  it  bought  the  Richmond  &  Danville,  and  on  July  7  the  East 
Tennessee,  Virginia  &  Georgia.  Two  trustees'  sales,  one  receivers' 
sale,  ten  foreclosure  sales,  and  six  conveyances  without  foreclosure 
had  occurred  by  September,  1894,  and  more  minor  sales  were  in 
progress.1  On  June  15  the  Southern  Railway  Company  was  organ- 
ized with  a  charter  from  the  state  of  Virginia,  and  took  over  in  suc- 
cession properties  to  the  extent  of  4607  miles.2  Samuel  Spencer  was 
elected  president.  Some  thirty  corporations  were  swept  away  and 
thirty  boards  of  directors  abolished ;  for  the  Southern  Railway  was  an 
operating  company,  and,  unlike  the  Richmond  Terminal  and  the 
Richmond  &  Danville,  controlled  but  an  inappreciable  fraction  of 

1  R.  R.  Gaz.  26:  613,  1894. 

2  Statement  compiled  by  the  reorganization  committee.  Chron.  59:  515,  1894.  The 
mileage  controlled  by  the  Richmond  Terminal  system  on  November  30,   1892, 
had  been  9053.3. 


1 88  RAILROAD  REORGANIZATION 

its  mileage  through  the  ownership  of  stock.  The  new  securities  were 
issued  at  the  proper  times,  and  according  to  the  plan  the  common 
and  preferred  stock  was  turned  over  to  three  voting  trustees,1  who 
issued  trust  certificates  in  their  stead. 

This  completed  the  reorganization  of  the  Richmond  Terminal 
Company  so  far  as  the  principal  part  of  its  mileage  was  concerned. 
The  portions  of  the  system  excluded  from  the  plan  have  been  to 
some  extent  bought  back  in  later  years.  Control  of  the  Alabama 
Great  Southern  was  bought  in  1895 ;  tne  Memphis  &  Charleston 
was  acquired  in  1898;  the  Richmond  &  Mecklenburg  was  leased 
hi  1898  and  the  Mobile  &  Birmingham  in  1899;  and  the  North- 
eastern of  Georgia  was  bought  in  1899.  The  system  has  not  yet, 
however,  fully  regained  its  old  position.  The  most  important  loss 
has  undoubtedly  been  that  of  the  Central  of  Georgia.  We  left  this 
company  engaged  in  active  disputes  with  the  Terminal  management. 
During  1892  and  1893  efforts  to  reorganize  it  were  made  under 
the  leadership  of  Hollins  &  Co.  The  principal  difficulties  were 
the  large  floating  debt  and  the  money  required  to  put  the  pro- 
perty into  good  physical  condition.2  A  plan  was  actually  prepared 
at  the  beginning  of  1893  and  submitted  to  securityholders,  but 
failed  because  of  that  same  decline  in  earnings  which  had  caused 
the  modification  of  the  Terminal  reorganization  plan.  A  second 
plan,  prepared  in  1894,  had  a  better  fate,3  and  in  modified  form 
was  put  into  effect.  The  Railroad  was  sold  at  auction  in  1895,  the 
Central  of  Georgia  Railway  was  organized  to  take  its  place,4  and 
the  corporation  entered  upon  a  new  career  which  we  have  not 
space  to  follow.5 

As  for  the  Southern  Railway,  the  years  from  1895  to  1907  have 
brought  it  prosperity.  It  has  extended  considerably  in  mileage. 
Besides  reacquiring  lines  which  formerly  were  part  of  the  Rich- 

1  J.  P,  Morgan,  Charles  Lanier,  and  George  F.  Baker.   See  Chron  59:  836,  1894, 
and  Ibid.  880,  1894. 

2  See  statement  by  Receiver  Comer.    Chron.  55 :  805,  1892. 

3  Chron.  60:  1008,  1895. 

4  With  a  charter  from  the  state  of  Georgia. 

5  The  capital  stock  of  the  Central  of  Georgia  Railway  was  held  by  the  Richmond 
Terminal  Reorganization  Committee  until  the  spring  of  1907.    It  was  then  sold 
to  Oakleigh  Thorne,  president  of  the  Trust  Company  of  America,  and  Marsden 
J.  Perry.    Later  the  same  year  these  gentlemen  resold  this  stock  to  E.  H.  Harriman 
and  his  associates. 


THE  SOUTHERN  189 

mond  Terminal  system,  it  has  grown  south  to  Jacksonville  and 
Palatka,  east  to  Charleston  and  to  a  more  direct  connection  with 
Norfolk,  and  west  from  Louisville  to  East  St.  Louis.  It  has  further 
joined  its  Louisville- East  St.  Louis  line  to  Chicago  by  acquiring 
a  half -interest  in  the  Monon,  and  to  the  rest  of  its  system  by  a  half- 
interest  in  the  Cincinnati,  New  Orleans  &  Texas  Pacific;  and  it 
has  bought  control  of  the  Mobile  &  Ohio,  which  stretches  through 
four  states  from  East  St.  Louis  to  Mobile.  Instead  of  4392  miles 
as  operated  on  June  30,  1895,  it  now  reports  7546.  The  earnings 
of  the  system  have  increased  more  rapidly  than  its  mileage.  The 
revival  of  business  after  1897  occurred  with  singular  force  in  the 
South,  and  seems  to  have  introduced  there  a  new  industrial  era. 
As  a  result,  the  Southern's  gross  earnings  have  trebled  and  its  net 
earnings  have  been  multiplied  by  two.  Passenger  receipts,  which 
were  $4,329,499  in  1895,  have  become  $14,683,006  in  1907.  Freight 
receipts  have  increased  from  $10,816,024  to  $37,368,095. 

It  has  been  this  increase  in  earnings  which  has  at  last  allowed 
some  of  that  margin  for  improvements  which  the  reorganization 
plans  weakly  attempted  to  secure.  And  accordingly,  large  sums 
have  been  expended.  Maintenance  of  way  charges  are  now  over 
$1000  per  mile  instead  of  $630.  Expenses  per  locomotive  mile  have 
increased  from  4.19  cents  in  1895  to  7.54  cents  in  1907;  expenses 
per  passenger  car  mile  from  .83  to  1.03  cents;  and  expenses  per 
freight  car  mile  from  .47  to  2.18  cents.  It  is  true  that  locomotives 
and  cars  are  larger  to-day  and  that  rails  are  heavier,  but  this  fact 
is  far  from  accounting  for  the  difference.  Not  only  has  the  existing 
plant  been  kept  in  good  repair  from  earnings  alone,  but  distinct 
improvements  have  been  made.  New  rail  has  been  laid,  additional 
ballast  put  in,  wooden  trestles  filled  or  replaced  with  steel.  It  was  es- 
timated in  1906  that  $5,000,000  had  been  spent  in  betterments  and 
charged  against  income  up  to  that  time,  besides  some  $15,000,000 
more  paid  for  equipment  out  of  earnings.  Meanwhile  considerable 
sums  had  been  spent  from  capital  account.  The  reorganization  plan 
allowed  for  some  $19,000,000  of  new  bonds  to  be  sold  at  the  rate  of 
$2,000,000  per  year.1  Of  these  the  company  had  sold  $13,000,000 
for  improvement  of  the  property  by  February  i,  1906,  besides  dis- 
posing of  some  $23,000,000  of  equipment  obligations. 

1  The  original  estimate  was  $19,000,000.  The  amount  available  seems  to  have 
been  finally  $20,000,000. 


190  RAILROAD  REORGANIZATION 

The  appreciation  of  the  need  for  still  more  liberal  expenditure 
led  in  1906  to  a  comprehensive  plan  for  the  issue  of  new  capital. 
Under  date  of  February  i,  the  company  submitted  to  its  voting 
trustees  l  a  scheme  for  a  $200,000,000  mortgage,  of  which  $15,000,- 
ooo  were  to  be  issued  at  once  and  the  rest  were  to  be  reserved. 
Of  the  immediate  issue  $4,962,774  were  to  refund  payments  for 
equipment  hitherto  made  and  charged  to  capital;  $3,501,000  were 
to  refund  investments  in  securities  of,  and  advances  to,  subordinate 
companies,  as  well  as  to  be  used  for  the  acquisition  of  property 
not  heretofore  funded;  and  $6,536,226  were  for  double  track,  re- 
vision of  grades,  new  yards,  shops,  etc.  Of  the  securities  reserved, 
$65,164,000  were  for  refunding  purposes:  $20,000,000  for  certain 
subsidiary  lines:  and  $99,834,000  to  go,  first,  for  betterments  and 
improvements  on  the  entire  system  and  for  new  equipment  in 
amounts  not  exceeding  $5,000,000  in  each  year;  and  second,  in 
exchange  for  first  mortgage  bonds  not  exceeding  in  amount  the 
actual  cost  of  railroads  and  terminals  hereafter  to  be  acquired. 
In  other  words,  about  one-half  of  the  total  issue  is  to  go,  sooner  or 
later,  for  improvements,  and  the  rest  for  refundings  and  for  new 
acquisitions.2  It  was  believed  that  the  Southern  could  readily  pay 
the  interest  on  the  increased  immediate  issue  without  endangering 
dividends  on  its  preferred  stock,  and  that  the  subsequent  increases 
in  earnings  would  more  than  provide  for  whatever  additions  to 
charges  might  occur.  Negotiations  for  the  placing  of  the  new 
securities  were  concluded  with  J.  P.  Morgan  &  Co.  at  a  reported 
price  of  96  J. 

The  results  of  the  expenditures  for  improvements  have  been 
remarkable.  In  1895  the  Southern  Railway  had  in  use  623  loco- 
motives; in  1907  the  number  was  1536.  In  the  former  year  there 
were  487  passenger  cars  and  18,924  freight  cars;  in  the  latter  there 
were  respectively  995  and  56,225^  Only  370  miles  of  track  in 
1895  were  over  65  pounds  in  weight  per  yard;  more  than  3100 

1  The  voting  trust  was  extended  in  1902,  in  respect  to  a  majority  of  the  stock, 
for  a  period  of  five  years.   See  Chron.  75:  442,  1902,  and  R.  R.  Gaz,  34:  826,  1902. 

2  Annual  Report,  1906. 

3  The  narrow-gauge  equipment  included  in  these  figures  is  as  follows : 

1895  1907 

Locomotives                               9  4 

Passenger  cars                            9  4 

Freight  cars                              86  106 


THE  SOUTHERN  191 

surpassed  that  limit  in  1907.  It  is  nevertheless  in  its  inability  to 
handle  the  business  offered  it  that  the  Southern  has  provoked 
sharpest  criticism.  Over  3600  miles  of  its  system  still  have  rails 
weighing  62  pounds  or  less  to  the  yard ;  —  that  is,  rails  incapable 
of  meeting  modern  operating  conditions.  Only  206  miles  of  double 
and  1981  of  side  track  exist.  Equipment  appears  to  be  still  inad- 
equate. Signals  are  imperfect,  and  speed  and  promptness  seem- 
ingly impossible  to  attain.  The  late  tragic  death  of  Mr.  Spencer 
was  a  forcible  illustration  of  the  deficiencies  of  the  road  which  he 
had  done  so  much  to  improve. 

The  earning  power  of  the  system  cannot  yet,  therefore,  be  said 
to  be  secure.  Moreover,  the  capitalization  of  almost  $72,000  per 
mile,1  as  well  as  the  less  dense  railroad  business  in  the  South,  the 
slight  construction  of  many  of  the  Southern  Railway  lines,  the 
lack  of  adequate  facilities  which  compels  an  operating  ratio  of  76 
per  cent,  and  the  absorption  of  minor  roads  less  prosperous  than 
the  main  stem,  —  all  these  factors  have  kept  down  the  net  surplus 
from  operation.  On  the  other  hand,  the  management  is  making  an 
earnest  attempt  to  raise  the  standard  of  the  property.  Bonds  and 
notes  to  the  par  value  of  over  $32,000,000  have  been  sold  to  pro- 
vide for  additions  and  improvements  during  the  past  year,  and  a 
very  great  change  for  the  better  has  taken  place.  Dividends  on  the 
preferred  stock  have  been  paid  since  1897.  As  the  country  de- 
velops, and  as  the  sums  spent  upon  improvements  come  more  and 
more  to  have  their  effects,  a  dividend  upon  the  common  stock  will 
be  paid.  The  near  future  is  more  likely  to  witness  the  cessation 
of  dividends  upon  the  preferred. 

1  "It  will  hardly  be  claimed,"  said  the  Interstate  Commerce  Commission,  of  the 
Southern  Railway  in  1900  (8  I.  C.  C.  Rep.  583),  "  that  the  cost  of  reproducing  that 
property  in  its  present  state  would  equal  $40,000  a  mile." 


CHAPTER  VI 
ATCHISON,  TOPEKA  &  SANTA  FE 

Charter  —  Strategic  extensions  —  Competitive  extensions  —  Effect  on  finances  — 
Raise  in  rate  of  dividend  —  Reorganization  of  1889  —  Acquisition  of  the  St. 
Louis  &  San  Francisco  and  of  the  Colorado  Midland —  Income  bond  conversion 
—  Receivership  —  English  reorganization  plan  —  Mr.  Little's  report —  Final 
reorganization  plan  —  Sale  —  Subsequent  history. 

THE  Atchison,  Topeka  &  Santa  Fe  Railroad  has  been  reorganized 
twice,  in  1889  and  in  1893-5  J  the  first  time  without,  but  the  second 
time  after  a  foreclosure  sale.  The  keynote  of  its  history  has  been 
extension.  It  was  the  enterprise  of  the  men  in  control  before  1889 
which  gave  it  the  position  and  power  it  holds  to-day,  but  it  was 
also  that  enterprise  which  necessitated  its  first  reorganization  by 
imposing  upon  it  heavier  burdens  than  it  could  bear. 

Chartered  in  Kansas  in  1863,  the  Atchison  spread  west,  south- 
west, south,  and  northeast.  It  received  some  aid  from  the  state 
of  Kansas  in  the  shape  of  a  grant  of  lands,  but  depended  primarily 
on  the  investment  of  private  capital.  Kansas  itself  was  not,  in  1870, 
a  very  encouraging  field  for  railroad  building.  It  had  been  admitted 
as  a  state  only  in  1861,  and  could  boast  for  the  most  part  of  less  than 
two  inhabitants  to  the  square  mile ;  —  although  settlement  was 
pushing  westward  with  considerable  rapidity,  and  stores  of  mineral 
wealth  had  been  discovered  in  Colorado.  The  railroad  in  those  days 
had  to  create  its  own  traffic,  and  population  followed  the  means 
of  transportation.  The  peculiarity  of  Kansas  was  a  central  position, 
which  lent  itself  to  schemes  of  the  most  far-reaching  nature.  A 
railroad  reaching  from  one  end  of  the  state  to  the  other  might  almost 
equally  well  have  been  extended  to  California,  to  Chicago,  or  to  the 
Gulf ;  and  could  be  sure  in  time,  if  it  survived,  of  the  carriage  of  a 
vast  volume  of  traffic  out  in  every  direction  from  the  Central  West. 
The  Atchison  managers  saw  this  opportunity,  and  courageously 
and  persistently  endeavored  to  realize  it ;  —  part  of  the  project  they 
announced,  and  part  they  kept  back  till  the  fitting  time  should  come. 

The  systematic  extension  of  the  Atchison  Railroad  may  be  divided 
into  four  parts: 


ATCHISON,   TOPEKA   &  SANTA   FE  193 

(1)  The  construction  through  Kansas  to  Colorado,  to  save  the 
charter,  then  down  the  valley  of  the  Rio  Grande  to  Albuquerque. 

(2)  The  securing  of  a  connection  with  the  Pacific  Coast  by  con- 
struction, lease,  or  traffic  agreement. 

(3)  The  connection  with  the  Gulf. 

(4)  The  connection  with  Chicago. 

As  the  system  neared  completion,  and  its  territory  came  to  be 
invaded  by  other  roads,  there  were  added  to  this  systematic  exten- 
sion what  may  be  called  competitive  extensions,  consisting  largely 
in  the  construction  of  branch  lines,  and  multiplied  beyond  anything 
which  the  country  could  need  for  years  to  come.  This  sort  of  build- 
ing was  most  prominent  from  1884  to  1888  and  will  be  considered 
in  its  place. 

The  first  stretch  of  road  was  built  with  few  difficulties  or  com- 
plications. It  was  commenced  in  1869,  and,  after  numerous  delays, 
it  reached  the  western  border  of  the  state  of  Kansas  on  December 
28  of  the  same  year;  from  this  point  it  went  on  more  leisurely, 
first  west  and  then  southwest,  to  Albuquerque.1  These  early  miles 
were  paid  for  from  the  proceeds  of  both  stocks  and  bonds.  From 
Albuquerque  a  variety  of  routes  presented  themselves.  The  South- 
ern Pacific  had  by  that  time  built  to  El  Paso,  and  it  was  feasible  to 
extend  the  Atchison  to  that  point  and  to  rely  on  a  traffic  agreement 
for  the  handling  of  the  western  business.  Or,  building  to  Deming 
near  El  Paso,  Atchison  might  have  extended  its  line  down  the  river 
valleys  in  the  northwestern  part  of  Mexico  to  Guaymas  on  the  Gulf 
of  California.  Or,  Atchison  might  have  built  directly  west  from 
Albuquerque.  All  three  of  these  routes  were  considered,  and  all 
three  were  eventually  carried  out.2 

The  connection  with  the  Southern  Pacific  was  not  a  very  difficult 
one  to  make,  and  the  Atchison  reached  Deming  in  March,  1881. 
By  the  traffic  agreement  then  concluded  the  Atchison  secured  the 
use  of  the  Southern  Pacific  tracks  from  Deming  to  Benson,  Arizona, 
and  arranged  to  build  south  into  Mexico  from  this  point;  while 
the  Southern  Pacific  was  allotted  51  per  cent  of  the  through  rate 
on  traffic  passing  over  Southern  Pacific  lines.3  This  formed  the 
second  through  route  from  the  East,  and  in  September,  1881,  it 

1  This  route  followed  roughly  the  old  Santa  Fe  Trail. 

2  Chron.  29:  583,  1879.  *  Ibid.  33:  23,  1881. 


194  RAILROAD  REORGANIZATION 

took  one-quarter  as  much  business  as  the  Central  Pacific.  It  was 
also  the  first  of  Atchison's  projected  routes  to  be  completed.  The 
line  to  Guaymas  was  added  by  purchase.  Instead  of  building, 
Atchison  exchanged  its  stock  for  the  stock  of  the  already  existing 
Sonora  Railroad  in  the  proportion  of  one  to  two,  and  guaranteed 
the  interest  on  the  Sonora  first  mortgage  7  per  cent  bonds.1  This 
made  up  for  the  lack  of  an  independent  line  to  the  coast  further 
north.  The  total  of  Sonora  stock  was  $5,400,000,  requiring  $2, 700,000 
Atchison  stock  in  exchange.  The  total  first  mortgage  7  per  cent 
bond  issue  was  $4,050,000.  With  the  railroad  came  a  subsidy  of 
$2,608,200  (American  gold),  equal  to  $11,270  (Mexican)  per  mile. 
This  subsidy  kept  cropping  up  in  Atchison  finance  for  some  time, 
and  was  finally  adjusted  in  1896  by  the  transfer  to  the  company 
of  $1,159,800  in  3  per  cent  bonds  of  the  Mexican  Interior  Consoli- 
dated Debt. 

For  the  direct  route  President  Strong  sought  the  help  of  the 
St.  Louis  &  San  Francisco,  and  the  use  of  the  charter  of  the  Atlantic 
&  Pacific  which  it  owned.  The  Atlantic  &  Pacific  was  a  road  in- 
corporated in  1886,  with  a  charter  to  build  from  St.  Louis  to  Cali- 
fornia. In  spite  both  of  its  charter  and  of  its  name  it  had  never 
gone  further  west  than  Vinita,  in  the  northeast  corner  of  Indian 
Territory.2  President  Strong  and  the  Frisco  now  agreed  to  con- 
tinue construction  under  the  name  of  the  Atlantic  &  Pacific,  both 
from  Vinita  and  from  Albuquerque.  The  Atchison  was  to  be  given 
a  half-interest  in  the  charter,  directors  were  to  be  chosen  equally 
from  the  two  companies,  and  the  cost  was  to  be  met  by  a  $25,000,000 
loan,  which  the  Atchison  and  the  Frisco  were  to  guarantee  jointly 
but  not  severally.3  Before  the  new  construction  neared  completion, 
however,  the  St.  Louis  &  San  Francisco  fell  under  the  control 
of  Messrs.  Gould  and  Huntington,  who,  as  owners  of  the  Texas 
&  Pacific  and  the  Southern  Pacific  respectively,  naturally  dis- 
approved of  the  plan  to  extend  the  Atlantic  &  Pacific  to  the  coast. 
The  Atchison,  therefore,  agreed  to  build  no  further  west  than  the 
Colorado  River.  At  that  point  the  Southern  Pacific  was  to  meet  it 
with  a  line  from  Mojave.  The  Southern  Pacific  gave  to  the  Atlantic 

1  Chron.  34:315,  1882,  Circular  of  Sonora  Railroad  Company  to  stockholders. 

2  Chron.  29:  630,  1879.    Statement  by  Vice-President  Baker. 

3  Ibid.  29:  630,  1879. 


ATCHISON,   TOPEKA   &»  SANTA   FE  195 

&  Pacific  an  interest  guarantee  on  its  bonds  to  the  extent  of  25  per 
cent  of  the  gross  earnings  derived  from  Atlantic  &  Pacific  through 
business,  and  the  latter  road  retained  all  its  rights  for  a  line  in 
California.1  This  proved  unprofitable,  for  the  Southern  Pacific 
persistently  diverted  traffic  to  Ogden  and  El  Paso,  and  in  1884 
still  another  arrangement  was  made.  By  this  — 

(a)  The  Atlantic  &  Pacific  bought  the  Southern  Pacific  division 
between  the  Needles  (the  Colorado  River)  and  Mojave,  242  miles, 
for  $30,000  per  mile,  and,  until  such  time  as  title  could  be  given  by 
the  discharge  of  the  mortgage  upon  it,  took  a  lease  at  an  annual 
rental  of  6  per  cent  on  the  purchase  price. 

(b)  The  Atlantic   &  Pacific  secured  trackage  and  traffic  rights 
and  facilities  between  Mojave  and  Oakland  and  San  Francisco,  as 
well  as  the  use  of  terminals  at  the  latter  point. 

c)  The  Atchison  (and  the  St.  Louis  &  San  Francisco  likewise) 
agreed  to  buy  from  the  Pacific  Improvement  Company  first  mort- 
gage bonds  and  other  securities  of  the  Atlantic  &  Pacific  of  the  par 
value  of  $3,096,768,  at  the  actual  cost  to  the  Improvement  Com- 
pany, to  wit,  $1,524,356. 

To  complete  the  connection  to  the  coast  the  Atchison  built  from 
Waterman,  some  seventy  miles  east  of  Mojave  on  the  Atlantic  & 
Pacific,  to  Colton  on  the  Southern  Pacific,  and  secured  control  of 
the  California  Southern  from  Colton  to  San  Diego.2  In  1885  entrance 
was  obtained  to  Los  Angeles  by  lease  of  the  Southern  Pacific  track 
between  Colton  and  that  city.3 

The  money  for  this  rapid  progress  was  obtained  by  the  sale  of 
both  stocks  and  bonds,  but  on  the  whole  stock  predominated.  The 
directors  rightly  considered  it  much  more  conservative  to  issue 
stock  and  sell  it  at  par  than  to  load  the  road  down  with  a  heavy 
debt  in  the  shape  of  bonds;  and  what  is  more,  they  were  able  to 
make  good  their  word,  and  to  sell  stock  at  or  near  par  in  spite  of 
the  risk  incident  to  operations  such  as  the  Atchison  was  conducting 
and  the  frequent  bonuses  or  stock  dividends  declared. 

By  1884,  then,  Atchison  had  reached  the  Pacific  coast.  The  next 
great  steps  were  the  extensions  to  Galveston  and  to  Chicago.  The 

1  Chron.  34:  243,  1882.  2  Chron.  41:  444,  1885. 

3  Annual  Report,  1885,  contains  a  discussion  of  the  Atlantic  &  Pacific  and  of 
the  California  Southern  projects. 


196  RAILROAD  REORGANIZATION 

year  of  entrance  to  Los  Angeles  the  Atchison  did  not  cross  the 
southern  boundary  of  Kansas.  Certain  of  its  stockholders  were, 
however,  unofficially  interested  in  the  Gulf,  Colorado  &  Santa  Fe, 
which  ran  from  Galveston  on  the  south  to  the  Indian  Territory  on 
the  north,  roughly  200  miles.  In  1884  a  charter  was  obtained  for 
the  Southern  Kansas  Railway  Company,  a  corporation  organized 
solely  to  build  south  from  Arkansas  City.  The  same  year  the  Gulf, 
Colorado  &  Santa  Fe  obtained  permission  to  stretch  north.  The 
two  roads  met  at  Purcell  in  the  summer  of  1887. *  In  1886  the  Gulf, 
Colorado  &  Santa  Fe  was  formally  brought  in.  Gulf  stock  then 
amounted  to  $4,560,000  and  bonds  had  been  issued  to  a  limit  of 
$17,000  per  mile.  For  the  entire  capital  stock,  subject  to  the  above 
encumbrance,  Atchison  agreed  to  pay  $8000  a  mile  in  Atchison 
stock,  par  value.2  The  final  move  was  to  get  into  Chicago.  "The 
Atchison  Company  has  been  much  too  conservative  during  the  last 
few  years,"  said  the  Chronicle,  "and  thus  has  allowed  its  territory 
to  be  invaded."  The  first  intent  was  to  build  direct.  There  were 
incorporated,  in  Illinois  the  Chicago,  Santa  Fe  &  California  Rail- 
way Company,  and  in  Iowa  the  Chicago,  Santa  Fe  &  California 
Railway  Company  of  Iowa.  In  1887  the  Atchison  was  able  to  pur- 
chase the  Chicago  &  St.  Louis  Railroad,  between  Chicago  and 
Streator,  with  a  branch  to  Pekin,3  and  to  save  itself  construction 
between  these  points.  The  whole  line  was  opened  for  traffic  in  May, 
i888.4 

This  completed  Atchison's  systematic  extensions  before  1889. 
From  a  local  road  in  Kansas  it  had  become  a  through  route,  taking 
freight  over  its  own  rails  from  Chicago  to  Galveston  and  to  the 
Pacific  coast.  But  especially  in  the  latter  eighties  competition  had 
become  keen ;  and  to  its  strategic  extensions  Atchison  was  obliged 
to  add  competitive  building  on  an  enormous  scale.  Of  the  7000 
miles  in  1888,  over  2700  had  been  added  since  January,  1886,  and 
had  been  built,  not  to  tap  new  sources  of  traffic,  but  to  defend  what 
was  thought  to  be  Atchison's  rightful  territory  by  means  of  a  desper- 
ate war  of  rates.  "About  three  or  four  years  ago,"  said  a  competent 
observer,  "a  mania  seized  three  great  corporations  (Atchison, 
Missouri  Pacific,  and  Rock  Island)  to  gridiron  Kansas  with  railroad 

1  Chron.  42:  462,  1886;  Annual  Report,  1887.  2  Ibid.  42:  518,  1886. 

3  Annual  Reports,  1886  and  1887.  4  Annual  Report,  1888. 


ATCHISON,   TOPEKA   fir-  SANTA   FE  197 

iron,  and  each  tried  hard  to  see  which  could  cover  the  most  ground, 
without  regard  to  the  character  of  the  ground,  the  result  [being  that] 
railroads  were  built  where  they  would  not  be  required  for  ten  years 
to  come."  l  Such  roads  could  not  be  expected  to  pay,  and  in  fact 
did  not.  Even  in  the  case  of  better  planned  extensions,  the  lines 
had  to  be  built  hi  an  unopened  territory,  the  traffic  of  which  had  yet 
to  be  developed.  In  Indian  Territory,  Oklahoma,  and  Arizona, 
the  bulk  of  the  country  had  less  than  two  inhabitants  to  the 
square  mile;  in  New  Mexico  and  Lower  California  only  one- 
half  of  the  area  was  more  thickly  settled ;  and  it  was  largely  from 
this  southwestern  corner  that  local  traffic  for  the  Atchison  had  to 
be  built  up. 

The  method  of  financiering  these  competitive  extensions  varied: 
sometimes  the  parent  company  guaranteed  the  principal  and  interest 
of  the  branch-line  bonds ;  sometimes  it  took  these  into  its  treasury 
and  issued  collateral  bonds  against  them ;  sometimes,  perhaps  more 
frequently  still,  it  leased  new  roads  for  a  rental  equivalent  to  the 
annual  interest  on  their  bonds.  If  the  branches  could  have  earned 
their  fixed  charges  the  burden  on  the  Atchison  would  have  been 
nominal,  but  as  in  large  part  they  could  not  it  was  real  and  serious. 
In  1888  there  were  actually  paid  in  rentals,  interest  on  Sonora  Rail- 
way bonds,  and  on  sundry  railway  bonds,  $2,361,300.  Large  sums 
were  carried  to  capital  account.  In  1888  there  was  an  accumulated 
account  of  "due  from  sundry  leased,  controlled,  and  auxiliary  roads 
in  construction  and  general  account"  (net)  $13,558,678,  including 
various  cash  current  construction  and  other  charges,  which  was 
carried  as  an  asset,  but  which  in  reality  consisted  of  advances  from 
which  there  was  little  or  no  hope  of  return.  Besides  the  claims  for 
interest  the  parent  company  had  in  practice  other  claims  to  meet. 
Where  a  branch  failed  to  earn  operating  expenses,  as  often  hap- 
pened, sums  had  to  be  advanced  to  keep  the  road  and  rolling  stock 
in  repair.  Thus  the  item  "due  from  auxiliary  roads  hi  current 
traffic  and  operation  accounts"  amounted  in  1888  to  $1,008,554. 
Bills  and  accounts  payable  the  same  year  were  $6,553,775,  and 
accrued  interest,  taxes,  and  sinking  funds  totalled  $915,337.  The 
following  table  shows  vividly  the  effect  upon  the  system  of  the 
rapid  extension  of  the  years  1884  to  1888: 

1  Ry.  Rev.  29:  511,  1889. 


198  -RAILROAD  REORGANIZATION 

Total  System 

1884  1888 

Mileage  2,799  7>oio 

Bonds  48,258,500  163,694,000 

Stock  (Atchison)  60,673,150  75,000,000 

Gross  earnings  16,699,662  28,265,339 

Operating  expenses  9,410,424  21,958,195 

Net  earnings  from  operation  7,289,237  6,307,145 

Net  profits,  excluding  dividends  5,147,883  def.  2,933,197 
Net  profits,  including  payments  for  dividends  and 

interest  on  floating  debt  def.  5,557,323 

Whatever  may  be  said  as  to  the  necessity  of  extension,  it  is 
evident  that  the  position  of  the  system  by  1888  had  changed  for 
the  worse.  This  last-named  year  was  a  bad  one,  it  is  true,  but 
certain  evils  of  which  the  directors  then  complained  were  per- 
manent, and  should  have  been  permanently  allowed  for.  Some 
realization  of  the  fact  that  the  Atchison  might  be  going  too  fast 
appeared  in  the  financial  journals  of  the  time.  "Were  these  under- 
takings less  solidly  backed,"  said  the  Railway  Age,  "  there  might  be 
apprehension  that  enterprise  was  being  pushed  too  far  and  too 
fast."1  But  on  the  whole  the  rapid  growth  and  enormous  extent 
of  the  system  seem  to  dazzle  beholders.  "The  career  of  this  com- 
pany," said  the  Railway  Age  again,  "has  been  one  of  the  marvels  of 
railway  enterprise,  and  it  would  be  unsafe  now  to  attempt  to  fix  a 
limit  to  its  extension  or  to  the  ambition  of  its  Napoleonic  president 
and  its  bold  and  enterprising  directors."  2 

In  1887  the  directors  increased  the  rate  of  dividend  from  6  to  7 
per  cent.3  The  action  was  thoroughly  unjustifiable,  and  the  rate 

1  Ry.  Age,  12:  107,  1887.  2  Ibid.  12:  325,  1887. 

3  This  increase  in  dividend  gave  rise  to  sharp  and  well-merited  criticism.  The 
directors  defended  their  action  as  follows: 

"In  forming  a  just  opinion  of  this  matter,"  said  they,  "  it  is  necessary  to  recall 
to  the  stockholders  the  statement  made  in  the  circular  of  July  30,  1887.  ...  It 
was  stated  in  the  circular  referred  to  that  for  the  six  months  ending  July  i,  1887, 
the  net  earnings  exceeded  by  more  than  $1,200,000  the  net  earnings  for  the  first 
six  months  of  the  year  1886,  that  the  earnings  were  still  increasing,  and  what  has 
always  been  true  in  the  past  may  be  expected  this  year  also ;  namely,  that  the  revenue 
of  the  second  six  months  of  the  year  will  be  considerably  in  excess  of  that  of  the  first 
six  months.  ...  It  will  ...  be  seen  that  .  .  .  the  year  1887  formed  a  remark- 
able exception  to  what  had  hitherto  been  the  regular  course  of  Atchison's  earnings; 
the  second  half  of  that  year  showing  an  increase  over  the  first  half  of  only  $278,096 
gross,  and  $204,144  net.  .  .  .  Drouths,  failure  of  crops,  excessive  competition, 


ATCHISON,   TOPEKA   6r°  SANTA   FE  199 

was  speedily  again  reduced.  By  the  end  of  1888  the  main  company 
was  liable  to  be  called  on  any  year  to  the  extent  of  $8,625,365,  which 
was  the  amount  of  interest  on  auxiliary  roads  either  guaranteed  or 
payable  as  rentals.  In  four  years  the  mileage  of  the  Atchison 
system  had  increased  150  per  cent ;  its  bonded  indebtedness  239  per 
cent;  its  fixed  charges  216  per  cent;  and  its  gross  earnings  only  69 
per  cent ;  while  the  deficits  on  its  branch  lines  were  obviously  not 
matters  of  bookkeeping,  and  the  value  of  interchanged  business  was 
not  equal  to  the  increased  burdens  which  the  subsidiary  lines 
imposed.  The  floating  debt  mounted  up,  as  is  usual  in  times  of 
trouble.  From  a  total  of  $3,317,446  in  1884  it  increased  to  $8,076,059 
in  1888.  To  offset  it  the  directors  secured  in  October,  1888,  sub- 
scriptions to  a  $10,000,000  issue  of  "guarantee  fund,"  three-year 
notes.  Not  all  of  the  amount  authorized  was  to  be  sold  at  once,  but 
from  time  to  time  Atchison  was  to  call  on  subscribers  to  take  part 
of  their  subscription,  and  the  notes  were  to  bear  6  per  cent  from  the 
time  they  were  put  forth.1  For  the  rest,  the  directors  economized  as 
much  as  possible.  Salaries  were  cut  10  per  cent  hi  every  branch 
of  the  service,  beginning  with  the  president,  and  the  unlucky  7  per 
cent  rate  of  dividend  was  reduced  to  6  per  cent,  to  2  per  cent, 
and  then  to  nothing  at  all  in  successive  quarters.  None  of  these 
expedients  proved  sufficient.  In  fact,  the  situation  was  so  critical 
that  nothing  short  of  a  general  reorganization  could  probably  have 
secured  the  radical  reduction  in  fixed  charges  which  the  company 
required. 

In  September,  1889,  accordingly,  Messrs.  Libby,  Abbott,   Pea- 

continually  decreasing  rates,  unwise  legislation,  strikes,  and  other  calamities  have 
befallen  us  as  they  have  other  Western  roads ;  but  your  directors  could  not  know  in 
advance  that  any  of  these  unfavorable  conditions  would  have  to  be  met,  much  less 
that  they  would  all  have  to  be  met  at  one  and  the  same  time."  Annual  Report,  1888. 

This  defence  was  altogether  unsatisfactory.  An  increase  in  the  dividend  rate 
is  too  important  to  be  justified  by  anything  but  earnings  actually  in  hand.  More- 
over, the  conditions  which  the  directors  held  responsible  for  the  decline  in  Atchison 
earnings  were  either  well  known  at  the  time  when  the  dividend  was  declared,  or 
could  easily  have  been  anticipated.  It  was  even  alleged  that  the  decrease  in  busi- 
ness which  the  annual  report  for  1888  disclosed  was  due  to  lessened  carriage  of 
company  material  to  the  West  for  construction  of  new  track,  and  not  to  crop  failure 
or  other  decline  in  general  business.  See  R.  R.  Gaz.  21 :  327,  1889. 

1  Chron.  47:  472,  1888.  The  use  of  $3,000,000  of  the  notes  was  specifically 
deferred. 


200  RAILROAD  REORGANIZATION 

body,  and  Baring  were  appointed  a  committee  to  consider  the  broad 
question  of  financial  and  general  reorganization,1  and  in  October 
a  plan  for  the  complete  rehabilitation  of  the  company  was  brought 
forward.  The  obligations  with  which  the  plan  had  to  deal  are  indi- 
cated in  the  following  table  : 

Obligations  of  the  Atchison  Company  in  1889 

Principal  Interest 

Bonds,  guarantee  fund  notes  $160,786,000  $9,203,620.00 

Contingent  issue  of  additional  bonds  775,000  38,750.00 

Car  trusts  1,445,660  86,739.60 

$163,006,660  $9,329,109.60 
Less  interest  on  bonds  and  guarantee  fund  notes 
owned  by  the  Company  253,340.00 

$9,075,769.60 

Sinking  Fund  359,000.00 

Taxes  1,221,000.00 

Rentals  502,000.00 

$11,157,769.60 

Of  the  bonds  outstanding  $56,498,000  were  direct  loans  upon  the 
Atchison's  main  lines,  bearing  anywhere  from  4^  to  7  per  cent,  and 
$104,288,000  were  bonds  upon  some  of  the  thirty-two  subsidiary 
corporations  for  whose  obligations  the  Atchison  was  responsible. 

The  dealing  of  the  Libby  Committee  with  this  situation  was  in- 
telligent and  comprehensive.  It  proposed  an  increase  and  simpli- 
fication of  securities,  a  decrease  in  fixed  charges,  and  a  cancellation 
of  the  floating  debt.  In  place  of  the  forty-one  classes  of  bonds 
outstanding  it  suggested  that  two  grand  issues  be  put  forth,  one 
of  4  per  cent  general  mortgage  bonds  to  the  amount  of  $150,000,000, 
and  one  of  5  per  cent  income  bonds  to  a  total  of  $80,000,000. 
From  these  issues  $13,750,000  should  be  used  to  provide  for  cash 
requirements,2  and  the  remainder  should  be  employed  in  direct 

1  Ry.  Age,  14:  644,  1889. 

2  Cash  requirements  were  (Circular  No.  63,  Oct.  15,  1889): 

To  retire  outstanding  lease  warrants  $1,445,660 
To  expend  on  incomplete  construction  of  existing  lines,  and  for 

new  equipment  as  required  5,000,000 

To  pay  floating  debt  3,554,340 

$10,000,000 
And  the  provision  for  cash  subscription  was 

General  mortgage  45  $12,500,000 

Income  53  1,250,000 

$13,750,000 


ATCHISON,   TOPEKA   &  SANTA   FE  2OI 

retirement  of  old  obligations.  The  exchange  of  some  $216,000,000 
of  new  bonds  for  $163,000,000  of  old  was  to  mean  an  increase  in 
securities  outstanding,  but  since  interest  on  only  part  of  the  new 
bonds  was  to  be  obligatory  fixed  charges  were  to  be  less  than  they 
had  been  before.  The  managers  figured  on  what  the  property  could 
earn,  good  times  or  bad,  and  capitalized  this  sum  into  4  per  cent 
general  mortgage  bonds.  They  then  calculated  the  difference  be- 
tween this  and  the  former  return  to  bondholders,  and  capitalized 
the  difference  into  income  bonds.1  Each  individual  bondholder, 
therefore,  was  offered  a  chance  to  receive  the  same  return  which 
he  had  previously  enjoyed,  although  his  right  to  demand  an  annual 
payment  was  limited  to  an  amount  which  the  road  could  earn. 

A  few  points  deserve  to  be  specially  noticed.  The  reduction  in 
interest  was  sufficient  to  have  transformed  the  deficit  for  the  whole 
Atchison  system  for  1888  into  a  respectable  surplus,  providing  that 
no  dividends  had  been  paid ;  but  this  reduction  was  dependent  on 
the  retention  of  the  income  bonds  as  optional  obligations.  There 
was  no  cash  assessment.  Had  the  reorganization  taken  place  in  a 
time  of  general  depression,  the  sale  of  securities  for  cash  would 
probably  have  been  impossible,  but  the  days  of  depression  had  not 
yet  arrived.  The  stockholder  suffered  in  the  introduction  of  the 
principal  of  some  $67,000,000  additional  indebtedness  between 
him  and  his  property,  although  he  was  not  called  upon  directly; 
but  it  should  not  be  forgotten  that  for  a  long  while  the  Atchison 
stockholders  had  received  very  liberal  dividends,  both  in  stock  and 
in  cash,  and  could  not  well  complain  of  the  moderate  loss  now 
necessary.  There  was  no  voting  trust,  although  one  was  proposed, 
and  the  bonds  were  not  even  temporarily  given  voting  power.  The 
situation  seems  to  have  been'  that  the  securityholders  thought  it 
more  to  their  advantage  to  reduce  voluntarily  the  rate  of  interest 
than  to  force  a  foreclosure  sale  and  take  their  chances;  for  the 
directors,  in  submitting  the  plan,  said  that  they  felt  it  necessary  "to 
state  in  the  strongest  terms  that  the  non-success  of  this  proposal 
will  inevitably  result  in  foreclosure,  with  all  its  attendant  misfor- 
tunes." 2 

1  The  income  bond  certificate  is  printed  in  full  in  W.  A.  Wood,  Modern  Business 
Corporations,  pp.  237-9. 

2  Ry.  Age,  14:  682,  1889. 


202  RAILROAD  REORGANIZATION 

By  the  end  of  November,  although  the  plan  had  not  been  pro- 
mulgated until  well  into  October,  more  than  one-half  of  the  out- 
standing bonds  had  assented,  and  the  directors  were  enabled  to 
announce  success.  Certain  changes  in  the  management  had  already 
taken  place.  President  Strong  had  resigned  in  September,  and  had 
been  succeeded  by  Mr.  Allen  Manville,  general  manager  of  the  St. 
Paul,  Minneapolis  &  Manitoba  Railway.1  Mr.  Reinhart  was 
credited  with  a  large  part  in  the  construction  of  the  new  plan  of 
1889,  and  his  later  promotion  may  have  been  connected  therewith. 

After  the  reorganization  Atchison  resumed  its  policy  of  expan- 
sion, its  new  directors  being  apparently  as  "bold  and  enterprising" 
as  the  old.  In  1890  it  took  in  the  St.  Louis  &  San  Francisco,  a  road 
running  from  St.  Louis  west  and  southwest  through  Missouri,  Kan- 
sas, Arkansas,  and  Indian  Territory,  connecting  at  Paris,  Texas,  with 
the  Gulf,  Colorado  &  Santa  Fe,  and  through  half -ownership  of  the 
Atlantic  &  Pacific  connecting  Albuquerque  in  New  Mexico  with 
Barstow  in  Southern  California.  The  total  length  of  the  Frisco 
system,  exclusive  of  jointly  owned  roads,  was  1329  miles,  and  this 
constituted  the  largest  single  acquisition  that  the  Atchison  had 
ever  made.  The  terms  of  the  purchase  were  highly  favorable  to 
the  Frisco  shareholders,  but  the  benefits  to  the  Atchison  were  less 
than  was  expected.  Although  the  consolidation  removed  certain 
difficulties  experienced  from  the  joint  ownership  of  the  Atlantic 
&  Pacific,  and  although  the  united  roads  were  in  a  better  position 
to  compete  for  transcontinental  and  Gulf  traffic  than  either  of  them 
had  been  before,  the  Atchison  directors  were  forced  to  announce 
in  1891  that,  "  with  every  opportunity  given  it  to  work  with  advant- 
age, the  property  (Frisco)  has  failed  to  demonstrate  its  ability  to 
carry  itself  financially  and  to  liquidate  its  debts ;  nor  could  it  hope 
to  obtain  such  results  without  the  provision  of  New  Capital.  .  .  . 
This  is  due  largely  to  the  absence  of  complete  and  proper  facilities 
and  machinery  with  which  to  conduct  operations  in  the  nature  of 
Round  Houses,  Machine  Shops,  Stations  and  other  buildings,  im- 
proved Bridges  and  Equipment."2  A  bond  issue  was  needed,  and 
was  in  fact  put  forth,  —  the  Atchison  taking  a  goodly  share. 

1  Annual  Report,  1890.    Economies  were  secured  at  this  time  through  consoli- 
dation of  branch  lines  with  the  main  stem  and  in  other  ways. 
1  Annual  Report,  1891. 


ATCHISON,   TOPEKA   &  SANTA   FE  203 

Less  important  than  this  was  the  purchase,  in  1890,  of 
the  Colorado  Midland,  a  road  346  miles  long  in  Colorado,  valued 
chiefly  for  its  ore  traffic.  In  August,  1890,  the  Mexican  Government 
resumed  payment  of  the  Sonora  subsidy,  on  which  nothing  had 
been  paid  for  eight  years.1  It  does  not  seem  as  if  at  any  time  after 
1889  the  Atchison  enjoyed  unalloyed  prosperity.  The  year  1890 
showed  an  increase  in  net  earnings  of  48  per  cent  according  to  the 
figures  given,  and  the  directors  were  unhappy  until  they  had  in- 
creased the  fixed  charges  to  match,  but  the  year  1891  recorded  a 
falling  off,  and  1892  showed  a  comparatively  slight  gain  over  the 
figures  of  1891.  There  was  obviously  nothing  in  the  reported  figures 
to  cause  alarm,  but  there  was  nothing  which  justified  the  payment 
of  more  than  2f  per  cent  any  year  on  the  income  bonds,  or  of  any 
dividends  on  the  stock. 

Toward  the  end  of  1891  the  guarantee  fund  notes  fell  due.  They 
had  been  issued,  it  will  be  remembered,  to  protect  the  property  in 
1888,  and  were  secured  by  an  equal  amount  of  general  mortgage 
45;  but  now  the  directors,  disliking  to  put  these  45  on  the  market 
at  83},  decided  to  extend  the  notes  for  two  years  at  par  with  a  cash 
commission  of  one  per  cent.2 

Extension  of  the  guarantee  fund  notes  did  not  increase  the  fixed 
obligations,  it  merely  postponed  a  reduction;  but  the  conversion 
of  the  income  bonds  of  1889  acted  as  a  positive  increase.  There 
were  $80,000,000  of  these  incomes,  and  it  was  in  the  optional  charac- 
ter of  payments  upon  them  that  the  saving  of  fixed  charges  by  the 
reorganization  of  1889  had  consisted.  They  had  been  issued  instead 
of  preferred  stock  probably  because  more  acceptable  to  the  bond- 
holders; but  it  was  early  found  that  their  use  involved  difficulties 
which  had  not  been  sufficiently  regarded.  By  the  conditions  of 
their  indenture  no  bonds  could  be  inserted  between  them  and  the 
general  mortgage  45 ;  they  held  a  second  lien  for  all  time.  But  sim- 
ilarly it  was  difficult  to  put  bonds  after  them.  Their  lien  was  on 
income,  —  interest  was  payable  only  when  earned ;  any  regular 
mortgage  would  of  necessity  have  taken  precedence.  The  hindrance 
to  new  issues  was  real  and  serious,  and  although  some  check  on 
an  aggressive  management  was  salutary,  yet  the  system  required 
additions  and  improvements  from  time  to  time  which  could  not 

1  Chron.  51:  171,  1890.  J  Ibid.  53:  474,  1891. 


204  RAILROAD  REORGANIZATION 

be  supplied  from  current  income.  Under  these  circumstances  the 
Atchison  directors  decided  within  three  years  to  sacrifice  the  re- 
duction in  fixed  charges  secured  in  1889  in  order  to  obtain  new 
capital  with  greater  ease.  "It  is  the  opinion  of  the  Management," 
said  the  annual  report  for  1892,  "that  the  time  has  now  arrived 
when  all  the  obligations  of  the  Company  can  be  returned  to  a 
Fixed  Basis,  sufficient  funds  provided  to  take  care  of  all  Improve- 
ments .  .  .  required  for  at  least  four  years,  and  at  the  same  time 
the  junior  Bonds  and  Capital  Stock  be  restored  to  a  more  per- 
manent market  value  with  assured  returns  on  the  first,  and  probable 
balances  for  the  latter."1  "The  Atchison  plan  of  conversion," 
said  Mr.  Reinhart,  "...  is  the  completion  of  the  reorganization 
plan  put  in  effect  October  18,  1889,  and  returns  the  obligations  of 
the  company  ...  to  a  fixed  and  stable  basis.  .  .  ."2 

The  plan  so  cordially  referred  to  provided  for  the  issue  of  a  new, 
second  mortgage,  4  per  cent  bond,  and  the  exchange  of  this  secur- 
ity for  the  outstanding  income  bonds.  The  second  mortgage  was 
to  be  issued  in  two  .classes: 

(a)  $80,000,000.    These  were  to  exchange  for  income  53,  par 
for  par,  and  bore  a  rate  of  interest  which  increased  from  2\  per 
cent  in  1892  to  4  per  cent  in  1896,  and  then  remained  at  4  per  cent 
until  maturity. 

(b)  $20,000,000.    These  bore  4  per  cent  and  were  to  be  issued 
in  no  greater  sum  in  any  year  than  $5,000,000  for  specific  improve- 
ments on  the  Atchison  exclusive  of  the  Colorado  Midland  or  the 
St.  Louis   &  San  Francisco.    There  was  reserved  to  the  company 
the  right,  when  all  the  above  should  have  been  exhausted,  to  issue 
more  bonds  of  the  same  sort  as  in  class  B  for  the  same  purposes 
and  on  the  same  mileage,  up  to  a  limit  of  $50,000, ooo.3 

The  conversion  plan  was  approved  at  the  annual  meeting  in 
1892,  and  was  put  into  effect.  The  result  was  most  unfortunate. 
The  annual  burden  on  the  company  was  increased  at  the  very  time 
when  the  panic  of  1893  was  about  to  reduce  railroad  earnings,  while 
the  advantages  of  freer  issues  of  new  bonds  were  of  little  account 
in  a  year  when  the  sale  of  new  securities  was  practically  impossible. 
Moreover,  a  new  light  was  soon  to  be  thrown  on  the  whole  opera- 

.*  Annual  Report,  1892.  2  Ry.  Age,  17:  413,  1892. 

3  Annual  Report,  1892. 


ATCHISON,   TOPEKA   6-  SANTA   FE  205 

tion  by  disclosures  of  dishonest  manipulation  of  figures  in  the 
Atchison  reports. 

In  1892  and  1893  rumors  of  trouble  were  afloat,  and  were  re- 
peatedly and  vigorously  denied  by  Mr.  Reinhart,  president  of  the 
Atchison  Company.  Thus  in  June,  1893,  this  officer  declared  that 
"the  Atchison,  Topeka  &  Santa  Fe  Railroad  Company,  strictly 
speaking,  has  no  floating  debt.  Its  current  liabilities  are  more  than 
equalled  by  its  current  cash  assets."  In  December  Mr.  Reinhart 
said  again:  "The  interest  on  the  General  Mortgage  Bonds  of  the 
Atchison  Company,  due  January  i,  will  be  paid.  It  seems  hardly 
necessary  to  make  this  statement,  because  doubts  as  to  its  payment 
have,  in  my  judgment,  been  created  solely  by  speculators  who 
have  no  substantial  interest  in  the  property."  These  official  denials 
did  not  carry  conviction,  but  opinions  varied  as  to  the  seriousness 
of  the  situation.  The  Boston  News  Bureau  cheerily  insisted  that 
all  the  Atchison  needed  was  "days  of  grace"  during  the  existing 
depression,2  while  in  England  it  was  thought  that  the  rumors  of  a 
receivership  were  at  most  but  premature.3 

At  the  end  of  the  year  President  Reinhart  went  to  Europe  to  float 
a  loan.  On  his  return,  after  a  failure  to  obtain  subscriptions,  a 
receivership  was  applied  for  and  granted.  It  had  been  hoped  up 
to  the  very  last  moment  that  the  January  interest  could  be  met; 
but  the  refusal  of  English  bondholders  to  subscribe  additional 
capital,  the  failure  to  place  a  third  mortgage  loan  in  the  United 
States,  and  the  death  of  Director  Magoun,  one  of  the  strong  in- 
fluences in  Atchison's  affairs,  made  a  crash  inevitable.  Current 
obligations  had  mounted  to  over  $10,000,000,  credit  had  disap- 
peared, and  the  railroad  necessarily  succumbed.  The  Atlantic 
&  Pacific,  the  Colorado  Midland,  the  Gulf,  Colorado  &  Santa  Fe, 
and  the  Southern  California  lines  were  not  included  in  the  Atchison 
receivership,  though  the  Atchison  receivers  were  given  like  office 
in  respect  to  the  Atlantic  &  Pacific.4  The  Gulf,  Colorado  &  Santa 
Fe  announced  that  it  would  continue  to  operate  its  own  line,  and 
was  prepared  to  pay  its  current  obligations  as  before.5 

1  Chron.  56:  1014,  1893;  Ibid.  57:  1038,  1893.     2  Ry.  Rev.  34:  68,  1894. 

3  Ry.  Times,  64:  533,  1893. 

4  See  Chron.  58:  42,  1894,  for  an  official  statement  of  the  reasons  for  the  appli- 
cation to  the  courts. 

6  Ibid.  57:  1121,  1893.  Some  information  concerning  subsequent  railroad  com- 
petition during  the  Atchison  receivership  is  to  be  found  in  7  I.  C.  C.  Rep.  61. 


206  RAILROAD  REORGANIZATION 

No  sooner  was  failure  announced  than  committees  of  bond- 
holders sprang  up.  In  Boston  a  committee  was  formed  with  six 
members,  including  J.  L.  Thorndike  and  H.  L.  Higginson.  In  New 
York  the  Union  Trust  Company,  the  Mercantile  Trust  Company, 
the  New  York  Life  Insurance  Company,  Baring,  Magoun  &  Co., 
and  Giddes  &  Smith  got  together  in  a  committee,  with  Edward 
King  as  chairman.  A  second  New  York  committee,  R.  Somers 
Hayes,  chairman,  was  formed  by  express  invitation  of  the  road. 
A  directors'  committee  was  organized,  of  which  E.  B.  Cheney,  Jr., 
was  chairman.  The  London  holders  of  the  second  mortgage  class  A 
bonds  themselves  formed  a  committee.  Even  before  1888  Eng- 
lishmen had  invested  heavily  in  Atchison,  attracted  perhaps  by 
glowing  stories  of  the  business  to  spring  up  across  the  western  plains. 
It  was  said  that  not  only  had  they  been  influential  in  shaping  the 
reorganization  of  1889,  but  that  from  that  date  to  1893  the  manage- 
ment had  been  controlled  by  a  board  elected  by  proxies  entrusted 
to  representatives  of  English  interest.  In  particular  Englishmen 
had  become  interested  in  the  second  mortgage  bonds  of  1892,  suc- 
cessors to  the  income  bonds  of  1889,  holding  about  one-half  of  the 
total  issue,  and  they  now  fought  for  the  protection  of  this  issue  as 
against  the  stock. 

A  plan  of  reorganization  was  early  matured  after  the  English 
influence  substantially  as  follows:  Either  the  general  mortgage  or 
the  second  mortgage  bonds  were  to  be  foreclosed  and  a  new  company 
was  to  be  formed.  If  the  foreclosure  should  be  under  the  general 
mortgage,  overdue  interest  on  that  mortgage  was  not  to  be  paid, 
and  new  securities,  similar  to  the  existing  bonds,  were  to  be  issued, 
bond  for  bond.  If  the  foreclosure  should  be  under  the  second  mort- 
gage, the  company  was  to  provide  for  past  due  interest,  and  was 
to  assume  the  payment  of  principal  and  interest  on  the  general 
mortgage  bonds.  The  capital  stock  was  to  remain  as  before.  There 
was  to  be  a  new  income  mortgage  to  the  amount  of  $115,000,000,  of 
which  $84,000,000  were  to  go  for  the  existing  second  mortgage  A 
bonds,  and  $5,600,000  for  the  existing  B  bonds;  the  surplus  to  be 
given  for  assessments,  or  for  the  securities  of  such  auxiliary  com- 
panies as  it  should  be  thought  advisable  to  acquire.  These  income 
bonds  were  to  bear  5  per  cent  and  were  to  have  voting  power. 
There  was  to  be  a  second  mortgage,  to  amount  eventually  to 


ATCHISON,   TOPEKA   &  SANTA   FE  207 

$35,000,000;  of  which  $5,000,000  were  to  be  used  at  once  to  retire 
the  floating  debt  and  for  other  purposes,  and  $3,000,000  were  to  be 
used  each  year  for  improvements.   The  new  stock  was  to  be  held 
in  trust  until  5  per  cent  per  annum  should  have  been  paid  hi  cash 
on  the  new  income  bonds  for  three  consecutive  years.  Finally  there 
was  to  be  an  assessment  of  $12  per  share  upon  the  stockholders, 
the  proceeds  of  which  were  to  go  as  far  as  necessary  to  pay  the  debts 
of  the  old  company,  including  interest  on  the  general  mortgage.1 
On  the  whole,  the  scheme  was  to  put  the  Atchison  back  to  the 
condition  of  1889,  and  to  regain  the  margin  of  safety  afforded  by 
the  income  bonds.  So  far  it  was  acceptable  enough.  Conservative 
officers  had  looked  askance  at  the  income  bond  conversion  in  1892, 
and  this  was  a  simple  acknowledgment  of  the  mistake.    The  old 
difficulty  as  to  future  capital  requirements,  moreover,  was  evaded 
by  a  provision  for  an  annual  increment  of  second  mortgage  bonds 
to  take  precedence  of  the  incomes.  The  notable  part  of  the  scheme 
was  the  anxious  care  of  the  bondholders  to  protect  themselves. 
Since  their  bonds  had  been  converted  from  income  bonds  less  than 
two  years  before  they  could  not  claim  a  large  allowance  for  the 
reconversion ;  but  as  a  condition  of  their  assent  to  this  and  to  the 
introduction  of  a  second  mortgage  for  $35,000,000  before  their  lien 
they  demanded  not  only  a  bonus  of  5  per  cent  in  the  new  incomes 
for  their  holdings,  but  the  grant  of  voting  power  to  the  income 
bonds,  a  stock  assessment  of  $12  per  share,  and  the  interposition 
of  an  additional  $5,000,000  of  bonds  between  the  stock  and  the 
property  of  which  it  was  nominally  the  possessor.    "It  is  true," 
said  the  Railway  Review,  "that  the  scheme  contemplates  the  issue 
of  income  bonds  which  shall  be  given  to  assenting  stockholders  at 
par  in  return  for  the  cash  assessment,  but  it  is  a  little  difficult  to  see 
wherein  such  bonds  are  of  very  much  more  value  than  the  stock 
of  the  company  except  that  they  are  not  subject  to  assessment." 2 
The  reception  of  the  plan  was  what  might  have  been  expected. 
On  July  30,  in  London,  the  London  bondholders'  committee  met 
and  passed  a  resolution  in  its  favor.    Having  now  secured,  they 
said  in  substance,  the  substantial  features  for  which  they  had  con- 
tended, and  although  the  plan  was  not  altogether  what  they  could 
have  desired,  they  considered,  after  very  prolonged  and  anxious 

1  R.  R.  Gaz.  26:  465,  1894.  2  Ry.  Rev.  34:  358,  1894. 


208  RAILROAD  REORGANIZATION 

negotiations,  that  a  plan  had  been  arrived  at  which  was  the  best 
obtainable  in  the  interests  of  bondholders.1  Meanwhile  meetings 
of  stockholders  were  held  in  New  York  in  protest.  Resolutions  were 
adopted  condemning  the  plan,  and  a  stockholders'  committee  was 
chosen.2 

Debate  was  stopped  by  the  publication  in  August  of  the  report 
of  an  expert  who  had  been  selected  to  examine  the  books  of  the 
Atchison  Company.  Few  more  disgraceful  instances  of  the  juggling 
of  figures  have  been  brought  to  light  in  the  history  of  American 
railroad  finance.  Whereas  the  reports  of  the  company  had  shown  net 
earnings  steadily  increasing  from  $7,600,000  in  1890  to  $12,100,000 
in  1893,  being  ample  to  meet  existing  charges  and  to  pay  from 
2  to  2j  per  cent  on  the  income  bonds  besides  to  the  time  of  their 
conversion,  Mr.  Little,  the  expert,  reported  that  the  net  earnings 
had  never  exceeded  $8,085,608;  and  maintained  that  an  annual 
deficit  had  occurred  each  year  from  1894,  which  reached  the  por- 
tentous amount  of  $3,000,000  for  1891  alone.  The  condition  of  the 
company  was  far  worse  than  had  been  imagined,  and  all  plans  had 
to  be  thoroughly  recast.  The  following  is  an  abstract  of  the  report 
in  question: 

"I  have  already  advised  you  verbally,"  said  Mr.  Little,  "that 
income  was,  in  my  judgment,  overstated  in  these  several  years 
(since  '89),  to  the  extent  of  $7,000,000  or  more,  and  I  now  confirm 
this  specifically.  These  overstatements  may  be  classified  as  follows : 

"  (i)  Rebates.  For  the  four  years  ending  June  30,  1894,  the  debits 
for  rebates  to  shippers  on  the  Atchison  system  aggregated  $3,700,776, 
and  on  the  St.  Louis  &  San  Francisco  system  $205,879,  or  a  total 
of  $3,906,656. 

"  This  sum  was  charged,  not  to  the  earnings  from  whence  it  came, 
as  it  should  have  been,  but  to  an  account  entitled,  *  Auditor's  Sus- 
pended Account-Special,1  and  was  reported  from  year  to  year  as 
a  good  and  available  asset,  while  in  fact  it  had  no  value  whatsoever. 

"(2)  Additions  to  Earnings  and  Deductions  jrom  Expenses.  Next 
in  order  of  importance  to  the  rebate  account  comes  an  aggregate  of 
$2,791,000,  which,  on  instructions  from  the  East,  was  credited  from 
time  to  time  to  the  earnings  and  expenses  respectively,  but  which 
credit  has  no  foundation  in  fact.  Of  this  aggregate  $2,010,000  was 

1  Ry.  Times,  65:  817,  1894.  2  Ry.  Rev.  34:  379,  1894. 


ATCHISON,   TOPEKA   &•  SANTA   FE  209 

added  to  earnings  and  $781,000  deducted  from  operating  expenses, 
the  sum  of  the  two  being  debited  to  '  Auditor's  Suspended  Account' 

"  (3)  Improvements.  The  sum  of  $488,000  was  in  the  period  under 
consideration  transferred,  improperly  as  I  contend,  from  Operating 
Expenses  to  Improvements  or  Capital  Account,  these  Improve- 
ments being  finally  closed  into  the  account  of  Franchises  and  Pro- 
perty, which  represents  the  cost  of  the  road  and  property. 

"  (4)  Traffic  Balances.  It  further  appears  that  a  traffic  agreement 
for  a  division  of  business  was  formed  in  November,  1890  (running 
to  July,  1891),  between  the  Atchison  Company  and  certain  other 
companies,  whereby  such  other  companies  were  charged  with  a 
balance  of  $305,843,  which  the  Atchison  Company  was  unable  to 
collect,  and  which  is  absolutely  uncollectable,  and  should  have 
been  heretofore  written  off,  though  it  still  stands  as  an  asset,  and 
hence  must  be  written  to  the  debit  of  profit  and  loss."  l 

Two  facts  appear  from  these  charges  on  which  emphasis  was  laid 
from  different  points  of  view :  (i)  That  for  four  years  the  Atchison 
had  been  persistently  violating  the  law  by  the  granting  of  rebates. 
(2)  That  to  conceal  these  rebates,  and  for  other  purposes,  the  books 
had  been  so  systematically  falsified  as  to  defy  detection,  and  to  de- 
ceive not  only  the  investing  public  but  the  whole  railroad  world. 
The  report  was  handed  to  Mr.  Reinhart,  and  an  answer  was  re- 
quested by  the  following  day.  The  answer  was  made,  and  proved 
inadequate ;  for  though  Mr.  Reinhart  pointed  out  some  half-dozen 
items  which  he  argued  that  Mr.  Little  had  wrongly  excluded,  he 
explained  no  one  of  the  charges  directly  brought  against  him.2 
There  is  no  doubt  at  the  present  time  that  Mr.  Reinhart  was  guilty, 
though  perhaps  because  of  the  difficulty  of  fixing  legal  responsibility 
he  was  never  prosecuted  for  falsification  of  the  books.  He  resigned, 
of  course,  and  Major  Aldace  F.  Walker  was  appointed  receiver  in 
his  stead.  Two  months  later  he  was  indicted  with  other  officers  of 
the  company  and  certain  shippers,  not  for  falsifying  the  books, 
but  for  the  illegal  granting  of  rebates.  His  defence  was  that  he 
had  been,  at  the  time  the  rebates  were  given,  only  the  general 
auditor  at  Boston,  and  had  had  no  part  in  the  fiscal  or  executive 

1  Report  of  Mr.  Stephen  Little  to  the  New  York,  London,  and  Amsterdam  Com- 
mittees of  Reorganization,  1894. 

2  Chron.  59:  233,  1894. 


210  RAILROAD  REORGANIZATION 

business  of  the  road.1  The  Government  failed  to  prove  connection, 
and  the  case  fell  through. 

All  this  completely  altered  the  requirements  to  be  met  by  a  re- 
organization plan.  A  more  sweeping  reduction  in  charges,  and  a 
more  general  distribution  of  losses  was  needed  than  before  had 
been  the  case.  Old  proposals  were  laid  aside  once  and  for  all,  and 
a  new  scheme  was  built  up  from  the  beginning.  The  mortgage 
indebtedness  of  the  Atchison  in  1895  was  $233,595,247,  of  which 
the  first  and  second  mortgage  bonds  comprised  $217,258,276.  The 
reorganization  of  1889  had  done  its  work  in  one  respect  at  least, 
and  the  reorganization  managers  were  able  to  concentrate  their 
attention  on  two  issues.  The  annual  net  earnings,  according  to 
the  company's  reports  had  been : 

1890  $7,632,348 

1891  7,631,598 

1892  10,953,896 

1893  12,126,866 

but  as  corrected  in  Mr.  Little's  report  were : 

1891  $5,204,880 

1892  7,853,173 

1893  8,085,608 

1894  5,956,615 

Inasmuch  as  Mr.  Little  had  discovered  annual  deficits  of 

1891  $1,964,285 

1892  60,938 

1893  134,825 

1894  3,008,242 

it  was  very  evident  that  a  reduction  in  interest  charges  was  called 
for.  As  in  1889  the  salvation  of  the  company  was  sought  in  the 
substitution  of  securities  on  which  payment  was  optional  for  secur- 
ities bearing  an  obligatory  charge. 

Soon  after  Mr.  Little's  final  report  in  November  three  of  the 
existing  committees,  namely,  the  General  Reorganization  Com- 
mittee, the  London  Committee,  and  Messrs.  Hope  &  Co.  of  Am- 
sterdam, joined  in  a  Joint  Executive  Reorganization  Committee, 
with  Edward  King  as  chairman.2  With  these  now  worked  a  com- 
mittee chosen  by  the  directors  themselves.  The  result  was  a  re- 

1  Ry.  Times,  66:  543,  1894.          2  Chron.  59:  878,  1894;  Ibid.  59:  919,  1894. 


ATCHISON,   TOPEKA   &  SANTA   FE  211 

organization  plan  under  date  of   March  14,  1895.   The  purposes 
announced  were : 

(a)  To  reduce  fixed  charges  to  a  safe  limit ; 

(b)  To  make  adequate  provision  for  future  capital  requirements, 
subject  to  proper  restrictions  as  to  issue  of  bonds  for  this  purpose ; 

(c)  To  liquidate  the  floating  debt,  and  to  make  adequate  pro- 
vision for  existing  prior  lien  indebtedness  shortly  to  mature ; 

(d)  To  reinstate  existing  securities  upon  equitable  terms  in  their 
order  of  priority; 

(e)  To  consolidate  and  unify  the  system  (so  far  as  practicable) 
and  thus  to  save  large  annual  expense. 

It  was  proposed  to  foreclose  the  Atchison  general  mortgage  .  .  . 
and  to  vest  in  a  railway  company  the  bonds,  stocks,  and  other  pro- 
perties of  the  existing  company,  acquired  at  foreclosure  sale  or 
otherwise.  The  new  company  was  to  issue : 

(a)  Common  Stock  $102,000,000 

(6)  Five  per  cent  non-cumulative  preferred  stock  111,486,000 

(c)  General  mortgage  4  per  cent  bonds  96,990,582 

(d)  Adjustment  4  per  cent  bonds  51, 728,310 l 

Of  the  above  the  interest  on  only  the  general  mortgage  bonds  was 
to  be  a  fixed  charge ;  —  the  stock  obviously  got  a  return  only  when 
earned,  and  the  adjustment  bonds  were  income  bonds  hi  fact  if 
not  in  name.  Additional  issues  to  a  comparatively  small  aggregate 
were  provided  for,  but  no  mortgage,  other  than  the  general  and 
adjustment  mortgages,  was  to  be  executed  by  the  company,  nor 
was  the  amount  of  preferred  stock  to  be  increased,  unless  the  exe- 
cution of  such  mortgage,  or  such  increase  of  preferred  stock,  should 
have  received  the  consent  of  the  holders  of  a  majority  of  the  whole 
amount  of  preferred  stock  at  the  time  outstanding,  given  at  a  meet- 
ing of  the  stockholders  called  for  that  purpose,  and  the  consent 
of  the  holders  of  a  majority  of  such  part  of  the  common  stock  as 
should  be  represented  at  said  meeting.  The  securities  mentioned 
were  to  retire  all  previously  existing  issues.  Old  common  stock- 
holders were  to  receive  share  for  share  hi  the  common  stock  of  the 

1  In  addition,  prior  lien  bonds  were  authorized  to  a  maximum  of  $17,000,000,  of 
which  $12,000,000  might  be  used  if  desirable  in  place  of  general  mortgage  bonds  in 
the  retirement  of  guarantee  fund  notes,  equipment  bonds,  etc.,  and  $5,000,000  for 
necessary  improvements  within  five  years. 


212  RAILROAD  REORGANIZATION 

new  company.  They  were  to  be  assessed  $10  per  share,  and  to 
receive  for  the  assessment  $10  in  new  preferred  stock,  while  a  syn- 
dicate guaranteed  payment  of  assessments  by  engaging  to  take 
the  place  of  non- assenting  or  defaulting  stockholders.  The  gen- 
eral mortgage  bondholders  were  to  get  75  per  cent  of  their  hold- 
ings in  new  general  mortgage  45  and  40  per  cent  in  adjustment  45. 
The  second  mortgage  and  income  bondholders  were  to  be  assessed 
4  per  cent  and  were  to  get  new  preferred  stock.1  The  prior  lien 
bondholders  were  dealt  with  separately,  and  were  to  be  paid  either 
in  general  mortgage  43  of  the  additional  issues  (over  the  $96,- 
990,582)  mentioned,  or  in  the  new  prior  lien  bonds.  If  in  the  latter, 
the  general  mortgage  bonds  which  would  otherwise  have  been 
issued  were  to  be  held  for  the  ultimate  retirement  of  these  bonds. 
Provision  was  made  for  future  construction  and  additions  by  the 
allowance  of  $3,000,000  general  mortgage  bonds,  to  be  issued  each 
year  to  a  limit  of  $30,000,000,  and  then  of  $2,000,000  adjustment 
bonds,  to  be  issued  each  year  to  a  limit  of  $20,000,000.  Additional 
new  general  mortgage  bonds,  up  to  $20,000,000,  might  be  issued 
and  used  in  such  amounts  respectively  and  in  such  proportions 
as  the  Joint  Executive  Committee  might  determine,  for  the  acqui- 
sition of  the  Atlantic  &  Pacific,  the  St.  Louis  &  San  Francisco, 
and  the  Colorado  Midland;  and  for  like  purposes  $20,000,000 
preferred  stock.  The  lien  of  the  new  general  mortgage  was  to  cover 
all  properties  which  should  be  vested  in  the  new  company,  and 
also  any  other  property  which  might  be  acquired  by  use  of  any  of 
the  new  bonds,  but  the  Joint  Executive  Committee  might,  in  its 
discretion,  except  from  the  new  general  mortgage  the  stocks  and 
bonds  deposited  under  the  existing  general  mortgage,  representing 
branch  lines,  the  operation  of  which  should  be  found  to  be  un- 
profitable and  an  unnecessary  burden  to  the  system.  A  voting 
trust  was  considered,  but  was  rejected  as  unsatisfactory;  and  the 

1  Second  mortgage  A  bonds  received  113  per  cent  in  new  preferred  stock.  Second 
mortgage  B  bonds  received  118  per  cent.  "After  careful  consideration,"  said  the 
plan,  "  it  was  decided  to  be  best  for  the  interest  of  those  [the  second  mortgage] 
securities  that  they  should  now  be  converted  into  5  per  cent  preferred  stock,  pos- 
sessing full  voting  powers  and  preferential  rights  as  to  principal  as  well  as  interest, 
rather  than  revert  to  their  original  form  of  'Income  Bonds.'  It  was  not  thought  that 
a  greater  assessment  than  $10  could  be  raised  from  the  stock,  and  the  remainder 
had  to  come  from  the  junior  bonds." 


ATCHISON,   TOPEKA   6-  SANTA   FE  213 

committee  confined  its  efforts  to  the  securing  of  the  best  possible 
management. 

The  proposed  fixed  charges  amounted  to  $4,528,547 

Net  earnings  according  to  Mr.  Little  had  been  in  1891  5,204,880 

1892  7,8S3»i73 

1893  8,085,608 

1894  5,956,615 

Thus  the  new  charges  appeared  well  within  the  earning  power  of 
the  road.  The  plan  made  the  folio  whig,  provision  for  cash  require- 
ments : 

Assessment  on  Atchison  stock  at  $10  per  share  $10,000,000 

Assessment  on  second  mortgage  and  on  income  bonds  at  4  per  cent     3,567,644 

$13,567,644 
The  estimated  cash  requirements  were : 

For  receiver's  debt,  preferred  or  secured  floating  debt  of  the  Atchison 

Company,  estimated  as  of  January  i,  1895  $7,793,875 

Leaving  for  receivers  and  floating  debt,  accrued  interest  and  undis- 
turbed securities,  etc.,  5,773,7^9 

Si3,567,644  l 

This  reorganization  had  certain  interesting  features.  As  before 
remarked,  it  sought,  as  did  the  reorganization  of  1889,  to  replace 
securities,  the  interest  on  which  was  a  fixed  charge,  by  securities 
on  which  payment  of  interest  or  dividends  should  be  optional. 
But  whereas  the  earlier  reorganization  had  depended  on  income 
bonds,  this  plan  included  both  inco'me  bonds  and  preferred  stock. 
There  are  several  reasons  why  preferred  stock  is  preferable  to  in- 
come bonds,  and  it  will  be  remembered  that  a  peculiar  difficulty 
experienced  from  the  income  bonds  of  1889  had  arisen  from  the 
impossibility  of  putting  other  mortgages  ahead  of  them;  yet  that 
this  was  not  the  chief  obstacle  sought  to  be  avoided  by  the  use  of 
preferred  stock  at  this  later  date  appears  from  the  current  use 
of  adjustment  bonds.  Provision  for  future  capital  requirements 
was  hi  fact  made  in  another  way,  and  the  question  was  not  here 
involved.  So  far  as  the  acceptability  of  the  income  bonds  and  the 
preferred  stock  respectively  to  the  old  bondholders  was  concerned, 
it  should  be  noted  that  the  men  who  received  the  greater  part  of 
the  new  issue  were  the  holders  of  the  old  income  and  second  mort- 

1  The  plan  of  reorganization  was  published  separately,  but  was  reprinted  in 
Chron.  60:  658,  1895. 


214  RAILROAD  REORGANIZATION 

gage  bonds;  that  is,  Englishmen  who  had  already  shown  their 
preference  for  income  bonds  as  opposed  to  stock.  The  chief  reason 
for  the  new  expedient  seems  to  have  been  the  desire  to  retain  for 
the  general  mortgage  holders  a  priority  of  lien,  while  reducing  part 
of  their  holdings  to  the  level  of  an  optional  obligation.  If  income 
bonds  or  preferred  stock  alone  had  been  used,  these  would  neces- 
sarily have  been  given  to  the  owners  both  of  general  mortgage 
and  of  second  mortgage  or  old  income  bonds;  so  that  the  former 
might  have  received  a  larger  amount,  but  not  any  lien  different  hi 
kind.  By  the  scheme  proposed,  all  possible  interest  on  the  secur- 
ities given  for  old  mortgage  45  was  to  be  met  before  anything  was 
to  be  paid  on  the  equivalent  of  issues  which  had  been  inferior  before 
the  reorganization  took  place.  Abundant  provision  was  made  for 
future  capital  requirements.  That  lesson  had  been  learned  once 
for  all.  Cash  requirements  were  met  by  an  assessment.  In  speak- 
ing of  the  reorganization  of  1889  the  rule  was  laid  down  that  the 
disposal  of  securities  for  cash  is  impossible  except  at  an  enormous 
sacrifice  in  a  time  of  general  depression.  There  was  widespread 
depression  in  1895,  and  the  reorganization  managers  wisely  made 
no  attempt  to  negotiate  a  sale.  The  amount  of  the  assessment 
on  the  common  stock  was  very  considerably  above  the  quoted 
price  of  the  shares,  but  it  was  correctly  figured  that  the  hope  of 
future  increase  in  value  would  be  sufficient  to  induce  stockholders 
to  furnish  the  sums  required.  Not  to  tax  them  too  heavily  call  was 
made  also  on  the  junior  securities.  On  the  whole,  the  decrease 
of  $5,000,000  in  fixed  charges  more  than  compensated  the  stock- 
holders for  the  additional  obligations  put  between  them  and  their 
property ;  their  claim  on  the  road  itself  was  made  more  remote,  but 
their  chances  for  dividends  were  improved.  Examination  of  the 
plan  shows  clearly  that  nothing  was  taken  from  either  bonds  or 
stock  which  those  securities  had  a  right  to  retain.  The  bondholders 
could  not,  in  any  case,  have  received  more  than  the  earnings  of 
the  road ;  and  an  amount  equal  to  the  return  previously  due  them 
was  assured,  whenever  the  road  should  earn  it,  by  the  new  com- 
bination of  mortgage  and  income  bonds  and  preferred  stock.  As 
it  was,  hi  return  for  an  assessment  they  retained  the  right  to  par- 
ticipate in  any  future  prosperity,  a  right  which  has  proved  of  ex- 
treme value. 


ATCHISON,   TOPEKA   6-  SANTA   FE  215 

The  plan  was  underwritten  by  Messrs.  Baring  Bros.  &  Co. 
and  other  strong  foreign  and  American  bankers,  who  assumed  the 
liability  of  paying  the  assessment  and  of  taking  the  stock.1  The 
comment  at  the  time  was  favorable.  "On  the  whole,"  said  the 
Railway  Age,  "we  do  not  believe  that  any  one  who  is  acquainted 
with  the  properties  could  have  expected  a  more  satisfactory  plan 
than  that  which  the  committee  has  evolved."  2  The  London  bond- 
holders promptly  accepted  the  plan.  "We  are  disposed,"  said  the 
Railway  Times  of  London,  "to  regard  the  latest  of  Atchison  reor- 
ganization schemes  as  a  praiseworthy  attempt  to  grapple  with  a 
very  thorny  problem."  3  Such  opposition  as  there  was  came  from 
a  minority  of  the  stockholders,  and  was  directed  at  two  points :  the 
prevention  of  foreclosure,  and  the  inauguration  of  an  entirely  new 
administration.  It  was  asserted  that  certain  old  members  of  the 
board  of  directors  who  had  been  forced  to  resign  by  the  earlier  dis- 
closures, had  nevertheless  secured  the  election  of  successors  to  per- 
petuate their  policy  and  to  protect  their  interest.  With  a  directory 
so  constituted,  it  was  maintained  that  the  stockholders  would  have 
no  guarantee  of  important  changes  in  the  executive  offices,  financial 
policies,  or  business  methods  of  the  company.4  Sharp  criticism  was 
directed  to  a  statement  of  the  existing  board  which  referred  to  the 
"mistakes  and  misfortunes  of  the  previous  management."  "Only 
those  who  believe,"  said  the  Stockholders'  Protective  Committee, 
"that  gross  irregularities,  if  not  worse,  have  been  perpetrated  .  .  . 
may  be  relied  upon  to  probe  to  the  bottom  the  acts  of  the  former 
officers  of  the  Atchison."  5  On  the  other  hand,  the  accusations  of 
the  committee  were  asserted  by  the  directors  to  be  unqualifiedly 
false.8  It  soon  became  apparent  that  the  opposition  could  not 
muster  enough  votes  to  control  an  election,  and  although  their  fight 
had  been  begun  in  August,  they  had  proxies  by  November  for  only 
250,000  out  of  the  1,020,000  shares  of  stock.  Recourse  was  had  to 
the  courts,  and  an  attempt  was  made  to  secure  at  least  a  minority 
representation  on  the  coming  board  by  the  enforcement  of  a  provi- 
sion for  cumulative  voting  embodied  hi  a  Kansas  law  of  1879.  This 
failed  in  November,  1894,  and  no  further  obstacle  to  reorganization 
was  encountered. 

1  Ry.  Rev.  35:  208-9,  l895-          :  Ry-  Age,  20:  199,  1895. 
3  Ry.  Times,  67:  482,  1895.          *  R.  R.  Gaz.  26:  675,  1894. 
*  Ry.  Times,  66:  506,  1894.          •  Ry.  Rev.  34:  589,  1894. 


2l6  RAILROAD  REORGANIZATION 

Practically  all  of  the  assessments  were  paid  in  by  September  21. 
On  November  25  Mr.  E.  P.  Ripley  was  elected  president,  and  in  the 
first  week  of  December,  1895,  Mr.  Aldace  F.  Walker  was  elected 
chairman  of  the  board  of  directors  of  the  new  company.  On  Decem- 
ber 10,  1895,  the  property  and  franchises  of  the  Atchison  were  sold 
at  foreclosure,  and  were  purchased  for  $60,000,000  by  Edward  King, 
Charles  C.  Beaman,  and  Victor  Morawetz,  representing  the  reor- 
ganization committee.1  The  Atchison,  Topeka  &  Santa  Fe  Railroad 
Company  was  then  organized  by  the  purchasers  pursuant  to  the  laws 
of  Kansas,  under  a  certificate  of  incorporation  dated  December  12, 
1895.  Aboard  of  directors  was  elected,  and  by-laws  were  adopted. 
The  entire  estate  embraced  in  the  foreclosure  sale  was  duly  conveyed 
by  deed  of  the  same  date  as  the  incorporation  of  the  company,  in 
consideration  of  which  the  company  executed  a  delivery  to  the 
Joint  Executive  Reorganization  Committee  of  the  securities  ac- 
quired under  the  plan  of  reorganization.  Certain  subsidiary  roads 
were  subsequently  foreclosed  and  bought  in,  notably  the  Atlantic 
&  Pacific  and  the  Chicago,  Santa  Fe  &  California.  The  St.  Louis  & 
San  Francisco  was  not  so  bought  in.  "The  question  of  retaining 
the  St.  Louis  &  San  Francisco  as  a  part  of  the  Atchison  system," 
said  the  annual  report  of  1896,  "received  very  careful  considera- 
tion from  the  Directors.  ...  A  series  of  conferences  was  held, 
which  resulted  in  the  matter  ultimately  presenting  the  alternative  of 
the  sale  of  our  existing  interest  upon  favorable  terms,  or  the  purchase 
by  us  of  all  other  outstanding  interests  upon  terms  involving  the 
outlay  of  a  very  large  amount  of  both  cash  and  securities.  While  the 
future  control  of  that  road  was  regarded  as  important,  the  financial 
considerations  affecting  the  situation  prevailed,  and  the  sale  was 
decided  on  the  whole  to  be  more  prudent  than  the  purchase." 
"With  the  acquisition  of  the  Frisco,"  said  Mr.  Fleming  of  the  Joint 
Executive  Committee,  "the  fixed  charges  on  the  Atchison  system 
of  7780  miles  would  have  been  increased  from  $7000  to  $9000  per 
mile.  Atchison  is  financially  much  stronger  without  Frisco." 

This  ends  that  part  of  the  history  of  the  Atchison  Company  which 
can  be  connected  with  either  of  its  reorganizations.  From  1895  to 
the  present  time  the  Atchison  has  enjoyed  a  rapidly  increasing  pro- 
sperity, due  in  part  to  the  lightening  of  the  charges  upon  it,  in  part 

1  Chron.  61 :  1064,  1895. 


ATCHISON,   TOPEKA   &  SANTA   FE  217 

to  able  management,  and  in  part  to  the  great  increase  in  volume  of 
business  which  has  been  a  characteristic  of  the  time.  One  or  two 
things  may  be  noted.  A  final  settlement  has  been  made  of  the  rela- 
tions between  the  Southern  Pacific  and  the  Atchison  in  the  South- 
west. It  will  be  remembered  that  the  final  result  of  the  negotiations 
in  1882  had  been  the  purchase  of  the  former  Mojave  division  from 
the  Needles  to  Mojave,  but  that  since  title  could  not  be  acquired  until 
the  maturity  of  the  outstanding  mortgages,  Atchison  had  leased  this 
track  at  an  annual  rental  of  6  per  cent  on  the  purchase  price.  In 
1897  this  rental  was  cancelled.  The  Southern  Pacific  could  not 
even  then  give  a  clear  title,  but  exchanged  a  long  time  lease  of 
the  Mojave  division  against  a  similar  lease  of  the  Sonora  Railway, 
the  Atchison  branch  which  reached  from  Deming  to  Guaymas.  The 
rentals  cancelled  each  other,  and  the  actual  transfer  is  eventually  to 
take  place.1  The  arrangement  is  mutually  advantageous.  On  the 
one  hand  the  Mojave  division  formed  a  spur  of  the  Southern  Pacific, 
and  on  the  other  the  Sonora  Railway  was  totally  disconnected  from  the 
Atchison,  so  that  the  latter  company  was  obliged  to  use  the  Southern 
Pacific's  tracks  to  reach  the  property  at  all.  In  1898  Chairman 
Walker  of  the  Executive  Committee  was  able  to  announce  the  sub- 
stantial completion  of  negotiations  for  the  purchase  of  the  San  Fran- 
cisco &  San  Joaquin  Valley  Railroad,  running  from  Bakersfield  to 
Stockton,  California;  the  former  town  being  sixty-eight  miles  from 
Mojave  and  the  latter  something  less  than  that  from  San  Francisco.2 
Atchison  at  once  began  building  at  the  Stockton  end,  and  reached 
San  Francisco  the  following  year.  The  Santa  Fe  Terminal  Company 
was  then  incorporated  with  a  capital  stock  of  $1,000,000,  Atchison 
secured  a  traffic  contract  with  the  Southern  Pacific,  and  through 
freight  trains  were  run  from  Chicago  to  San  Francisco  on  May  i, 
1900,  through  passenger  trains  folio  whig  two  months  later.  Besides 
this  there  have  been  important  extensions  in  Arizona  and  New 
Mexico.  In  1901  the  Atchison  purchased  two-thirds  of  the  bonds, 
and  practically  all  of  the  capital  stock  of  the  Pecos  Valley  &  North- 
eastern Railway  Company,  stretching  370  miles  from  Texico 
through  the  southeastern  corner  of  New  Mexico  to  Pecos  City, 
Texas.  In  July  of  the  same  year  it  bought  the  Santa  Fe,  Prescott  & 
Phoenix  Railroad,  from  Ash  Fork,  Arizona,  to  Phoenix,  Arizona, 

1  Chron.  64:  609,  1897.  2  Ibid.  67:  841,  1898. 


2l8  RAILROAD  REORGANIZATION 

some  195  miles.  Construction  has  been  practically  completed 
between  Belen,  New  Mexico,  a  few  miles  south  of  Albuquerque, 
and  Amarillo,  Texas,  to  afford  an  alternative  and  somewhat  shorter 
route  from  California  to  Eastern  Kansas.  A  still  more  noteworthy 
project  is  under  consideration  for  a  road  to  join  the  Gulf,  Colorado  & 
Santa  Fe  at  Brownwood  with  the  Belen  line  at  Texico,  and  to  open 
direct  connection  over  the  Atchison  from  California  to  the  Gulf. 

Briefly  stated,  the  Atchison's  mileage  has  increased  from  6479 
miles  in  1897,  to  9273  in  1907.  Its  gross  earnings  have  grown  from 
$30,621,230  to  $93,683,407;  its  net  earnings  from  $7,754,041  to 
$32,153,692;  and  its  surplus  above  all  charges  from  $1,452,446  to 
$21,168,724.  This  marvellous  showing  has  been  accompanied  by 
heavy  expenditures  for  improvements,  so  that  the  physical  condition 
of  the  system  is  much  better  than  before.  Operating  expenses, 
fixed  charges,  and  taxes  took  less  than  77  per  cent  of  gross  income 
in  1907,  and  a  decline  of  over  $21,000,000  can  be  suffered  in  net 
before  interest  on  even  the  adjustment  bonds  becomes  imperilled. 
It  is  not  to  be  wondered  at  that  Mr.  Harriman  saw  fit  to  invest 
$10,395,000  of  Union  Pacific  money  in  Atchison  preferred  stock  in 
I906,1  nor  that  dividends  of  5  per  cent  on  preferred,  and  5  per  cent 
on  common  stock  are  being  paid.  The  Atchison  owns  1791  locomo- 
tives instead  of  953  as  in  1897;  1135  passenger  cars  instead  of  622; 
49,770  freight  cars  instead  of  26,776.  There  has  been  a  large  in- 
crease in  the  capacity  and  power  of  rolling  stock.  The  average 
freight  train  load  has  increased  from  131  to  320  tons.  Freight  train 
mileage  has  grown  but  35  per  cent,  while  ton  mileage  has  more  than 
tripled.  Thus,  although  the  average  length  of  haul  has  increased 
and  the  average  receipts  per  ton  mile  have  diminished,  the  earnings 
per  freight  train  mile  are  actually  more  than  double  in  1907  what 
they  were  in  1897.  And,  finally,  the  Atchison  is  not  dependent  for 
its  revenue  upon  any  single  kind  of  business.  Coal,  ore,  and  other 
mineral  products  yielded  but  30.87  per  cent  of  its  tonnage  in  1907 ; 
products  of  agriculture  25.34  per  cent ;  manufactures  17.37  per  cent ; 
and  products  of  the  forest  12.12  per  cent. 

1  This  was  not  all  the  Atchison  stock  which  Union  Pacific  interests  acquired. 
President  Ripley  testified  before  the  Interstate  Commerce  Commission  on  January  8, 
1907,  that  two  years  before  E.  H.  Harriman  and  his  associates  had  secured  $30,000,- 
ooo  of  Atchison  stock,  and  had  caused  the  election  of  Messrs.  H.  C.  Frick  and  H.  H. 
Rogers  to  the  Atchison  directorate  to  represent  them. 


ATCHISON,    TOPEKA   &  SANTA   FE  219    . 

The  capital  account,  meanwhile,  has  been  kept  from  undue 
expansion.  The  funded  debt  has  increased  from  $174,196,750  hi 
1897  to  $284,171,550  hi  1907,  but  the  capital  stock  has  decreased 
somewhat,  and  the  greater  part  of  the  new  bond  issues  have  been 
convertible  serial  debenture  bonds,  which  occasion  no  permanent 
increase  in  charges.  It  is  within  the  last  two  years  only  that  Atchison 
stockholders  have  authorized  the  issue  of  new  capital  on  a  scale 
commensurate  with  the  growth  of  their  property.  In  1 906  $26,060,000 
hi  4  per  cent  convertible  bonds  were  offered  to  them  at  par,  and  this 
last  year  they  have  authorized  the  issue  of  $98,000,000  of  common 
stock  for  improvements,  extensions,  and  the  like.  This  provides 
ample  facilities  for  the  future  without  endangering  the  solvency  of 
the  road. 


CHAPTER  VII 
UNION  PACIFIC 

Acts  of  1862  and  1864  —  High  cost  of  construction  —  Forced  combination  with 
the  Kansas  Pacific  and  the  Denver  Pacific  —  Unprofitable  branches  —  Adams's 
administration  —  Financial  difficulties  —  Debt  to  the  Government  —  Receiver- 
ship and  reorganization  —  Later  history. 

THE  construction  of  the  Union  Pacific  was  made  possible  by  direct 
grants  of  lands  and  government  bonds  by  Congress.  The  motive 
for  the  project  was  military  and  political  as  well  as  economic ;  on 
the  one  hand  California  was  to  be  cemented  to  the  Union,  and 
aggression  on  the  part  of  England  was  to  be  forestalled;  on  the 
other  a  great  and  fertile  territory  was  to  be  opened  and  an  additional 
market  provided  for  the  products  of  the  East. 

In  1862  the  first  act  "to  aid  in  the  construction  of  a  Railroad  and 
Telegraph  Line  from  the  Missouri  River  to  the  Pacific  Ocean, 
and  to  secure  to  the  Government  the  Use  of  the  same  for  Postal, 
Military,  and  Other  Purposes"  was  passed.1  It  created  a  corpora- 
tion to  be  known  as  the  Union  Pacific  Railroad  Company,  with  a 
capital  of  100,000  shares  of  $1000  each,  and  authorized  it  to  con- 
struct a  railroad  from  the  one  hundredth  meridian  of  longitude 
west  from  Greenwich  at  a  point  within  the  territory  of  Nebraska 
westward  to  the  western  boundary  of  the  territory  of  Nevada.  It 
granted  the  right  of  way,  and  in  addition  five  additional  sections 
per  mile  on  each  side  of  the  track,  plus  a  varying  amount  of  United 
States  bonds  per  mile,  the  use  and  delivery  of  which  was  to  consti- 
tute a  first  mortgage  on  the  property  of  the  company.  All  compen- 
sation for  services  rendered  to  the  Government  was  to  be  applied 
to  the  payment  of  these  bonds  and  interest  thereon ;  and  after  the 
road  was  completed,  until  the  bonds  and  interest  should  have  been 
paid,  at  least  5  per  cent  of  the  net  earnings  of  the  road  was  to  be 
annually  applied  to  the  payment  thereof.  The  directors  were  to 
be  not  less  than  fifteen  in  number,  of  whom  two  were  to  be  ap- 
pointed by  the  President  of  the  United  States.  It  was  hoped  that 
the  offer  would  be  sufficient  to  attract  private  capital  to  the  un- 

1  Statutes  at  Large,  37th  Congress,  2d  Session,  chap.  120. 


UNION  PACIFIC  221 

dertaking,  and  when  it  failed  in  this,  the  inducements  were  in- 
creased. The  Act  of  1864  amended  that  of  1862.  It  reduced  the 
par  value  of  the  shares  of  stock  from  $1000  to  $100,  and  increased 
their  number  from  100,000  to  1,000,000.  It  increased  the  land  grant 
from  five  to  ten  alternate  sections  per  mile,  and  subordinated  the 
government  lien  to  the  rank  of  a  second  mortgage.  Only  one-half 
the  compensation  for  services  rendered  for  the  Government  was 
required  to  be  applied  to  the  payment  of  the  bonds  issued  by  the 
Government.  The  directors  were  to  be  twenty  in  number,  of  whom 
five  were  to  be  appointed  by  the  Federal  President.1 

It  was  under  these  main  provisions  that  the  Union  Pacific  Railroad 
was  constructed.  In  their  final  shape  they  were  intended  to  provide 
for  the  greater  part  of  the  cost  of  construction,  while  allowing  the 
company  to  supply  deficiencies  by  the  issue  of  its  own  first  mortgage 
bonds.  Capitalization  under  these  conditions  would  not  have  been 
excessive;  the  Government's  investment  would  have  redounded 
unmistakably  to  its  own  benefit,  as  well  as  to  that  of  the  country, 
and  the  corporation  would  have  looked  forward  to  a  long  and 
prosperous  career.  Three  things  interfered  to  swell  the  cost  of 
the  construction  of  the  road,  and  with  that  its  capitalization :  First, 
construction  was  carried  on  during  a  time  of  high  prices,  swollen 
not  only  by  depreciation  of  the  currency,  but  by  artificial  conditions 
occasioned  by  the  war ;  second,  the  normal  le\el  of  the  prices  paid 
was  raised  by  the  speed  with  which  the  road  was  completed ;  third, 
construction  was  entrusted  to  a  construction  company,  the  famous 
Credit  Mobilier. 

In  its  comparison  of  the  prices  of  the  years  1864-9,  with  those  of 
1860,  the  Aldrich  Committee  arrived,  in  1893,  at  ^e  following 
result : 


Metals  6r>  Imple- 

Bar Iron 

Rails, 

ments  exc. 

Att 

Year 

Food 

Rolled 

Iron 

Pocket  Knives 

Articles 

1864    . 

165.8 

249-3 

262  5 

198.0 

190.5 

i86s 

216.5 

iSl.l 

205-5 

218.7 

216.8 

1866 

173-8 

167.0 

180.7 

192.7 

191.0 

1867 

163.9 

148.2 

173.2 

178.9 

172.2 

1868 

164.2 

145-8 

164.3 

167.1 

160.5 

1869 

162.9 

139-0 

160.9 

157-9 

153-5 

1  Statutes  at  Large,  38th  Congress,  ist  Session,  chap.  216. 


222  RAILROAD  REORGANIZATION 

These  figures  may  be  divided  by  the  premium  on  gold,  in  order 
roughly  to  ascertain  gold  prices.  The  index  numbers  then  become : 


Metals  &>  Im- 

Bar Iron 

Rails, 

plements  exc. 

All 

Year 

Food 

Rolled 

Iron 

Pocket  Knives 

Articles 

1864 

106.6 

160.3 

168.8 

127.3 

122.5 

1865 

IOO.I 

83.7 

95-o 

IOI.I 

100.3 

1866 

124.1 

119.2 

128.9 

137-5 

136-3 

1867 

121.8 

1  10.  1 

128.6 

132.9 

127.9 

1868 

118.6 

105.2 

118.6 

120.6 

"5-9 

1869 

1  20.  i 

102.5 

118.6 

116.4 

113.2* 

The  tables  show  that  both  currency  and  gold  prices  were  much 
higher  in  1866  than  before  the  war,  and  that  both  remained  high 
while  the  Union  Pacific  was  being  built.  Wages  were  also  above 
the  normal,  and  for  similar  reasons.  During  the  war  the  demand 
for  men  and  goods  of  all  kinds  was  great.  After  1865  the  country 
turned  with  tremendous  energy  to  industry ;  and  the  upward  swing, 
which  was  unchecked  until  the  panic  of  1873,  and  which  was  espe- 
cially directed  toward  railroad  building,  maintained  both  wages 
and  prices  at  an  unusual  height.  Besides  this,  American  rails  were 
at  the  time  in  a  period  of  transition  from  iron  to  steel;  and  much 
of  the  work  carried  through  at  such  expense  had  completely  to 
be  done  over  within  the  next  ten  years. 

The  high  prices  were  made  higher  by  the  speed  of  construction. 
The  Union  Pacific  built  west  from  the  Missouri  River,  but  at  the 
same  time  the  Central  Pacific  was  building  east  from  Sacramento, 
under  similar  conditions  as  to  government  aid.  The  two  roads 
were  expected  to  meet  at  the  western  boundary  of  Nevada;  but  to 
encourage  their  early  completion,  the  Act  of  1862  authorized  the 
road  which  first  reached  the  designated  point  to  continue  construc- 
tion, east  or  west  as  the  case  might  be,  until  junction  with  the 
second  road  should  be  made.  Since  the  amount  of  land  granted 
depended  on  the  mileage  completed,  the  haste  of  the  companies 
was  feverish.  "The  Union  Pacific  Company/'  says  Davis,2  "had 
its  parties  of  graders  working  200  miles  in  advance  of  its  com- 

1  Aldrich  Committee  Report.  The  value  of  gold  used  is  that  given  in  the  American 
Almanac  for  1878,  and  varied  fronTyear  to  year  as  follows: 

1864  155.5  l866  140.1  1868  138.5 

1865  216.2  1867  134.6  1869  135.6 
*  John  P.  Davis,  History  of  the  Union  Pacific  Railroad,  p.  151. 


UNION  PACIFIC  223 

pleted  line  in  places  as  far  west  as  Humboldt  Wells."  The  Central 
Pacific  had  completed  105  miles  east  of  Sacramento  by  the  autumn 
of  1867,  hauling  iron  and  supplies  over  the  mountains  without  wait- 
ing for  the  piercing  of  its  tunnels.  No  less  than  1038  miles  of  the 
Union  Pacific,  including  the  difficult  stretch  over  the  Rocky  Mount- 
ains, were  completed  by  1869,  four  years  after  construction  was 
commenced.  The  prize  of  additional  land  was  thereby  secured, 
but  this  land  was  long  unsalable,  and  the  cost  of  construction  was 
largely  increased. 

Finally,  large  sums  were  misapplied  through  a  construction 
company.  The  story  of  the  Credit  Mobilier  has  been  so  often  told 
that  only  brief  mention  need  be  made  of  it  here.1  In  1864  T.  C. 
Durant,  vice-president  of  the  Union  Pacific,  induced  one  H.  M. 
Hoxie  to  bid  for  a  contract  to  build  from  Omaha  to  the  one  hundredth 
meridian.  Hoxie  was  financially  irresponsible,  and  four  days  later 
assigned  the  contract  to  a  company  composed  of  Durant  and  other 
stockholders  of  the  Union  Pacific.  Meanwhile  Durant  had  purchased 
the  charter  of  the  Pennsylvania  Fiscal  Agency,  a  corporation  which 
possessed  convenient  powers.  Later  in  1864  the  members  of  Du- 
rant's  construction  company  were  given  stock  in  the  Fiscal  Agency, 
now  called  the  Credit  Mobilier  of  America,  for  the  amounts  they 
had  paid  in,  and  stockholders  of  the  Union  Pacific  were  allowed 
to  receive  Credit  Mobilier  stock  for  the  amounts  they  had  paid  in 
on  their  Union  Pacific  shares.  Stockholders  of  the  Union  Pacific 
thus  became  also  stockholders  of  the  Credit  Mobilier,  and  in  their 
former  capacity  were  enabled  to  vote  lucrative  contracts  to  them- 
selves as  constructors  of  the  railroad.  Durant 's  company  assigned 
its  contract  to  the  Credit  Mobilier.  Subsequently  it  was  found 
more  convenient  to  assign  contracts  to  certain  individuals,  who 
transferred  them  to  seven  trustees,  who  built  the  required  road 
with  funds  furnished  by  the  Credit  Mobilier,  and  turned  over  the 
profits  to  that  organization,  but  the  practical  result  was  the  same.2 
These  various  devices  removed  all  incentive  to  economy  on  the 

1  Useful  accounts  of  the  Credit  Mobilier  may  be  found  in  Davis,  Union  Pacific 
Railroad;  Crawford,   Credit  Mobilier  of  America;  Hazard,  The  Credit  Mobilier 
of  America;  White,  History  of  the  Union  Pacific  Railroad;  Poland  Committee, 
Report  and  Testimony,  426.  Congress,  3d  Session,  House  Reports,  No.  77. 

2  Davis,  pp.  163-70. 


224  RAILROAD  REORGANIZATION 

part  of  the  Union  Pacific  stockholders.  Instead  of  gaining  by  cheap 
construction,  they  profited  by  dear;  instead  of  aiming  to  reduce 
the  cost  in  every  possible  way,  they  schemed  at  making  the  con- 
struction contracts  as  lucrative  as  possible  to  the  persons  to  whom 
they  were  assigned.  The  advantages  to  them  as  stockholders  of  the 
Credit  Mobilier  outweighed  the  disadvantages  to  them  as  stock- 
holders of  the  Union  Pacific.  The  profits  realized  by  the  Credit 
Mobilier  are  still  a  subject  of  dispute.  H.  K.  White  figures  them  as 
27^  per  cent,  or  $16,700,000;  Davis  says  that  the  profit  was  safely 
over  $20,000,000;  but  whereas  White  calculates  the  percentage 
of  profits  to  the  total  cost  of  construction,  Davis  insists  that  a  large 
part  of  the  capital  invested  was  replaced  on  the  completion  of  each 
section  of  twenty  miles  by  the  proceeds  of  the  government  bonds 
and  railway  bonds  and  stock,  and  that  though  from  $50,000,000 
to  $70,000,000  were  expended,  in  all  probability  not  more  than 
$10,000,000  were  sunk  at  any  one  time;  in  which  case  a  profit  of 
$20,000,000,  spread  over  four  years,  represents  $5,000,000  per 
year,  or  50  per  cent  annually  on  the  capital  employed.  Finally, 
the  Union  Pacific  Railway  Commission  estimated  the  actual  cash 
profits  at  $23,366,320,  and  remarked  that  the  obligations  incurred 
by  the  railroad  company  represented  a  very  much  larger  sum, 
being  measured  by  the  bonds  and  stock  at  their  par  values.1 

The  result  of  the  three  factors  was  a  corporation  bonded  at  an 
extremely  high  rate.  The  cost  of  road  in  1870  was  reported  to  be 
$106,245,978,  or  $102,951  per  mile,  against  which  was  a  capitaliza- 
tion of  $107,907,300,  or  $104,561  per  mile,  of  which  $32,715  per 
mile  was  stock,  $26,080  government  bonds,  and  $45,765  first  mort- 
gage, land  grant,  and  income  bonds.  In  1873  the  net  earnings  were 
$4,092,032,  and  the  interest  on  the  funded  debt,  not  including  the 
government  interest,  was  $3,403,660.  In  1874  the  figures  were 
$5,291,243  and  $3,431,720;  in  other  words,  the  corporation  started 
with  a  heavy  handicap,  which  its  monopoly  of  transcontinental 
business  at  first  helped  to  overcome,  but  which  grew  heavier  and 

1  Union  Pacific  Railway  Commission  Report,  1887,  p.  52.  The  Government 
endeavored  to  force  the  cancellation  of  the  above  mentioned  construction  contracts 
and  the  restoration  of  unlawful  profits,  but  was  held  by  the  Supreme  Court  to  have 
no  standing  in  the  case  which  would  entitle  it  to  demand  relief.  U.  S.  vs.  Union 
Pacific  Railroad  Company,  98  U.  S.  569. 


UNION  PACIFIC  225 

heavier  as  the  years  went  on.  During  the  seventies,  to  repeat,  the 
Union  Pacific  enjoyed  generally  large  prosperity.  The  volume  of 
stock  outstanding  remained  the  same,  the  bonded  indebtedness 
but  slightly  increased,  and  the  ratio  of  operating  expenses  to  receipts 
declined.  The  first  dividend  was  paid  in  1875 ;  in  1876  and  1877 
8  per  cent  was  declared,  in  1878  5^  per  cent,  and  in  1879  6  per  cent. 
In  1880,  however,  a  consolidation  took  place  with  the  Kansas 
Pacific  and  Denver  Pacific  railroads,  and  this  operation  may  well 
receive  somewhat  detailed  consideration. 

The  Kansas  Pacific,  as  well  as  the  Union  Pacific,  was  a  creation 
of  the  Acts  of  1862  and  1864,  which  required  it  to  be  constructed 
from  Kansas  City  westwardly  to  form  a  junction  with  the  Union 
Pacific  at  a  point  on  the  one  hundredth  meridian.  Later,  an  Act 
of  July  3,  1866,  authorized  it  to  change  its  route,  and  to  connect 
with  the  Union  Pacific  at  a  point  not  more  than  fifty  miles  west- 
wardly from  the  meridian  of  Denver  in  Colorado.1  Like  the  Union 
Pacific  the  Kansas  Pacific  was  built  by  means  of  construction 
contracts,  which  resulted  in  a  total  capitalization  on  its  638  miles  of 
line  of  $9,437,950  in  stock  and  $22,651,000  in  bonds,  or  $14,793  and 
$33,455  respectively  per  mile,  — high  figures  in  view  of  the  compar- 
atively level  character  of  the  country  traversed.2  The  road  was  not 
a  paying  one.  It  was  poorly  built  and  poorly  managed,  and  running 
parallel  with  the  Union  Pacific,  it  had  to  meet  competition  of  a  very 
bitter  kind.  The  report  of  Mr.  Calhoun,  expert  accountant  for  the 
United  States  Pacific  Railway  Commission  of  1887,  showed  that  the 
total  receipts  of  the  road  from  1867  to  1879  had  aggregated  $9,220,- 
218,  while  the  bond  and  interest  account,  exclusive  of  United  States 
interest,  had  amounted  to  $15,745,287;  leaving  a  deficit  of  $6,525,- 
069,  or,  including  the  United  States  accrued  interest,  of  $n,33o,772.3 
That  is,  the  Kansas  Pacific  was  in  a  state  of  chronic  insolvency. 
In  1874  it  was  placed  in  the  hands  of  receivers,  and  the  following 
year,  by  an  arrangement  with  its  creditors,  it  funded  a  considerable 
amount  of  overdue  interest.4 

1  Statutes  at  Large,  3Qth  Congress,  ist  Session,  chap.  159. 

2  United  States  Pacific  Railway  Commission  Report,  1887,  p.  55. 

3  Ibid.  vol.  8,  p.  4975. 

4  Records  in  Union  Pacific  Railway  Foreclosure  Cases,  55th  Congress,  ist  Session, 
Senate  Document  10,  Part  3. 


226  RAILROAD  REORGANIZATION 

In  1878  a  number  of  securityholders  of  the  Kansas  Pacific  got 
together  in  an  attempt  to  reorganize  that  property,  to  take  it  out 
of  receivers'  hands,  and  to  "unite  in  interest  the  Kansas  Pacific 
and  Union  Pacific  Railway  Companies."  Twelve  large  security- 
holders  consented  to  contribute  to  a  common  pool  or  fund  holdings 
of  securities  taken  at  a  fixed  valuation,  their  interests  in  the  pool 
to  be  proportional  to  the  amounts  of  said  securities  and  stock  taken 
at  the  value  referred  to.1  For  the  securities  deposited  they  were 
to  receive  stock  at  a  reduced  rate :  thus  for  eight  shares  of  old  stock 
they  were  to  receive  one  share  of  new;  for  $2000  unsubordinated 
income  bonds  they  were  to  get  ten  shares,  and  for  $10,000  subor- 
dinated income  bonds  thirty  shares  of  new  stock.2  The  final  result 
would  have  been  to  replace  securities  with  a  par  value  of  $17,330,- 
350  by  stock  with  a  par  of  $4,855,300,  and  greatly  to  lighten  the 
burdens  upon  the  road ;  though  it  must  be  remembered  that  the 
$17,330,350  were  less  than  half  of  the  total  volume  of  securities 
outstanding,  that  the  payment  of  interest  on  much  of  these  had 
been  optional  only,  and  that  no  provision  was  made  for  the  floating 
debt. 

The  scheme  fell  through,  according  to  Mr.  Gould,  who  was  a 
party  to  the  agreement,  because  securityholders  outside  of  the  pool 
refused  to  consent  to  so  drastic  a  reduction  of  their  holdings ;  and 
at  his  suggestion  a  consolidated  mortgage  was  substituted  for  the 
issues  of  stock.  This  mortgage  was  for  forty  years  at  6  per  cent. 
The  total  issue  was  to  be  for  $30,000,000,  of  which  $24,000,000  were 
to  be  issued  at  once  for  the  retirement  of  earlier  bond  issues  and  for 
payment  of  arrears  of  interest.3  Like  the  previous  proposition  the 
scheme  contemplated  a  scaling  in  the  principal  of  the  junior  secur- 
ities, and  the  same  rates  of  commutation  were  retained;  but  in 
this  case  the  old  Kansas  Pacific  stock  was  withdrawn  from  the 
operation  of  the  plan,  and  certain  reservations  were  made  for  other 
purposes,  so  that  an  actual  increase  in  indebtedness  was  finally  to 

1  Parties  to  agreement  were:  Sidney  Dillon,  Fred  L.  Ames,  Jay  Gould,  C.  S. 
Greeley,  John  D.  Perry,  Robert  E.  Carr,  Adolphus  Meier,  B.  W.  Lewis,  Jr.,  Henry 
Villard,  John  P.  Usher,  D.  M.  Edgerton,  Artemas  H.  Holmes. 

2  United  States   Pacific  Railway  Commission  Report,  1887,  testimony  of  A.  H. 
Holmes,  p.  165. 

3  Ibid.  Testimony  of  Jay  Gould,  pp.  454~6-    The  change  to  a  mortgage  was 
made  between  April,  1878,  and  May,  1879. 


•  UNION  PACIFIC  227 

result,  and  even  the  interest  charges  were  certain  to  increase.1  For 
the  time  being,  however,  by  force  of  the  reduction  of  interest  on 
the  funding  mortgage  in  January,  1879,  from  10  to  7  per  cent,  and 
by  the  disallowance  of  some  claims  for  overdue  interest,  relief  was 
obtained,  while  the  consolidated  mortgage  was  duly  issued. 

The  Kansas  Pacific  ran  west  to  Denver.  Between  Denver  and 
Cheyenne  the  Denver  Pacific,  106  miles  long,  served  as  a  connecting 
link  between  the  larger  systems.  The  Denver  Pacific  stock  was 
held  by  the  Kansas  Pacific,  and  29,979  shares  of  it  were  pledged 
in  1877  as  part  security  for  an  issue  of  10  per  cent  funding  mortgage 
bonds.2  The  total  earnings  of  the  Denver  Pacific  from  1870  to  1879 
had  been  $3,122,141;  the  expenses  had  been  $1,709,477,  and  the 
net  earnings  from  operation  $1,412,664,  or  an  average  per  annum 
of  $141,266;  while  for  the  first  eight  years  of  that  time  the  annual 
interest  charge  had  been  about  $185,000.  The  only  value  of  the 
Denver  Pacific  stock  lay  in  the  control  which  it  secured  over  a 
connecting  link  between  Denver  and  Cheyenne.3 

Under  the  conditions  of  competition  existing  between  the  Union 
Pacific,  Kansas  Pacific,  and  Denver  Pacific,  some  sort  of  agreement 
or  consolidation  was  both  desirable  and  likely.  The  Kansas  Pacific 
was  entirely  dependent  on  its  competitor  for  access  to  western 
business,  and  this  was  soon  perceived  to  be  equivalent  to  continuous 
bankruptcy.  Extension  to  Ogden  would  have  removed  the  depend- 
ence; but  this,  while  to  be  dreaded  by  the  Union  Pacific,  was  beyond 
the  power  of  the  Kansas  Pacific  for  financial  reasons,  and  no  cap- 
italist or  group  of  capitalists  before  1878  or  1879  seemed  interested 
in  the  undertaking.  On  the  other  hand,  rates  were  low,  and  the 
very  success  of  its  exclusive  policy  forced  the  Union  Pacific  to  meet 
the  competition  of  a  road  which,  with  no  interest  charges  to  pay, 
was  able  to  cut  all  rates  to  the  very  verge  of  the  cost  of  operation. 

As  early  as  1875  there  was  talk  of  an  agreement  whereby  the 
Kansas  Pacific  was  to  give  up  its  claims  for  a  pro  rate  on  its  Pacific 
business  in  return  for  a  monopoly  of  the  local  business  of  Colorado, 

1  Records  in  Union  Pacific  Railway  Foreclosure  Cases,  55th  Congress,  ist  Ses- 
sion, Senate  Document  10,  part  3  (contains  text  of  mortgage). 

2  United  States  Pacific  Railway  Commission  Report,  1887,  testimony  of  A.  H. 
Holmes,  pp.  130  and  133. 

3  Ibid.  vol.  8,  p.  4987,  Report  of  William  Calhoun,  Accountant. 


228  RAILROAD  REORGANIZATION 

and  in  connection  with  the  deal  was  to  acquire  the  Colorado  Central 
Railroad  on  issue  of  $10,000,000  Kansas  Pacific  stock  to  parties 
designated  by  the  Union  Pacific  Company;  but  this  was  never 
carried  out.  In  1878,  when  Gould  began  to  be  interested  in  the 
property,  a  union  by  means  of  stock  control  seemed  feasible.  Gould's 
first  purchases  were  of  bonds,  and  it  was  as  a  bondholder  that  he 
entered  the  pool  of  1878;  but  with  the  purchase  of  the  holdings  of 
the  "St.  Louis  parties,"  he  and  his  friends  obtained  control  of  a 
majority  of  Kansas  Pacific  stock.  In  fact  one  of  the  provisions  of 
the  pool  was  that  if  on  the  first  day  of  June,  1878,  it  should  be  found 
that  Messrs.  Gould,  Dillon,  and  Ames,  all  large  stockholders  in  the 
Union  Pacific,  had  not  a  majority  interest  in  said  pool,  then  they 
should  have  an  option  on  such  an  amount  of  other  interest  ratably 
and  for  cash  as  on  the  basis  of  the  schedule  should  give  them  such 
an  interest ;  and  though  this  majority  did  not  necessarily  involve  a 
majority  of  stock,  the  operations  of  the  pool  aided  Gould  in  the 
acquisition  of  control.  The  union  between  the  Union  Pacific  and 
the  Kansas  Pacific  thus  secured  was,  however,  of  the  frailest  kind ; 
for  Mr.  Gould  at  no  time  had  the  permanent  interest  of  either  road 
at  heart,  and  looked  for  his  personal  profit  rather  in  their  struggles 
than  in  agreement  between  them.  For  this  reason,  as  he  bought 
Kansas  Pacific,  Gould  sold  Union  Pacific  stock,  reducing  his  holdings 
from  about  200,000  to  about  27,000  shares.1  In  1879  the  situation 
of  the  two  roads  was  thus  much  the  same  as  before,  and  the  har- 
mony apparent  was  of  the  most  superficial  kind.  One  change,  how- 
ever, had  taken  place  to  the  serious  disadvantage  of  the  Union 
Pacific;  for  the  Kansas  Pacific,  although  still  badly  built  and 
dependent  upon  its  rival  for  an  adjustment  of  rates  sufficiently 
favorable  to  let  it  into  the  western  business,  had  now  interested  in 
it  a  group  of  capitalists  quite  capable  of  financing  an  extension  to 
Ogden,  and  even  of  securing  connections  from  Kansas  City  to  the 
East. 

In  1879,  doubtless  relying  upon  the  strength  of  Kansas  Pacific's 
new  backing,  Gould  proposed  to  the  Union  Pacific  a  consolidation 
of  the  Union,  Kansas,  and  Denver  Pacific  roads,  in  which  the 
shares  of  each  were  to  figure  equally  at  par.  The  terms  were  absurd 

1  United  States  Pacific  Railway  Commission  Report,  1887,  testimony  of  Jay 
Gould,  p.  463. 


UNION  PACIFIC  229 

by  every  test  of  productive  capacity  which  could  have  been  applied. 
The  relative  earning  power  and  annual  interest  per  mile  of  the 
three  roads  at  this  time  were  given  by  a  government  accountant  as 
follows : 

Annual  Net  Earnings  per  mile  Annual  Interest  per  mile 
Union  Pacific                              $5617  $3185 

Kansas  Pacific  1602  2295 

Denver  Pacific  1333  1750 * 

The  Union  Pacific  had  reported  an  annual  surplus,  the  other  two  ' 
roads  an  annual  deficit;  the  Union  Pacific  had  not  defaulted,  the 
Kansas  and  Denver  Pacific  had  done  little  else ;  the  highest  mark 
which  the  Kansas  Pacific  stock  had  touched  in  January,  1879,  had 
been  13,  that  of  the  Union  Pacific  had  been  68^.  But  the  question, 
as  Gould  well  knew,  was  not  one  of  productive  but  one  of  destruc- 
tive capacity,  and  the  means  of  coercion  which  he  employed  was  a 
demonstration  of  the  ease  with  which  the  Kansas  Pacific  could  be 
made  formidable  as  a  competing  line.  In  November,  1879,  he 
purchased  the  Missouri  Pacific  from  Kansas  City  to  St.  Louis; 
about  the  same  time  he  bought  two  minor  roads  between  the  Kansas 
Pacific  and  the  Union  Pacific  in  Kansas,  and  announced  his  inten- 
tion of  extending  the  Kansas  Pacific  to  Salt  Lake  City,  there  to  con- 
nect with  the  Central  Pacific  and  to  form  a  third  transcontinental  / 
route.  The  story  is  clearly  told  in  the  report  of  the  United  States 
Pacific  Railway  Commission.2  The  result  was  the  consent  of  the 
Union  Pacific  directors  to  the  terms  imposed,  and  the  execution  of 
an  agreement  dated  January  14,  1880,  whereby  the  Union  and  the 
Kansas  Pacific,  with  all  their  respective  assets  and  liabilities,  were 
put  together  at  par  of  their  respective  capitals,  —  $36,762,300  and 
$10,000,000,  —  to  which  ,  was  added  the  capital  of  the  Denver 
Pacific,  $4,000,000,  forming  a  new  company  called  the  Union  Pacific 
Railway  Company,  with  a  capital  of  $50,762,300,  and  a  bonded 
indebtedness  of  $92,984,624.*  This  corporation  was  larger  in  every 
way  than  the  old  Union  Pacific  Railroad,  except  in  one  particular — 
earnings  above  fixed  charges.  It  had  1821  miles  of  line  instead  of 

1  United  States  Pacific  Railway  Commission  Report,  1887,  p.  58. 

2  Ibid.  pp.  59  to  65. 

3  Ibid.  Testimony  of  F.  L.  Ames,  p.  668.    The  combined  capital  is  given  in  the 
agreements  as  $51,762,300,  but  this  is  apparently  a  mistake. 


230  RAILROAD  REORGANIZATION 

1042 ;  $22,455,134  gross  earnings  instead  of  $13,201,077 ;  $10,545,119 
operating  expenses  instead  of  $5,475,503;  and  yet,  since  the  con- 
solidation was  a  union  of  some  strength  with  a  vast  deal  of  weakness, 
there  were  few  who  profited  by  it  save  the  holders  of  Kansas  Pacific 
or  Denver  Pacific  stocks.  Those  lucky  and  skilful  individuals  saw 
the  quotations  of  Kansas  Pacific  common  rise  from  a  high  level 
of  13  in  January,  1879,  to  one  of  59  in  June,  and  of  92 J  in  Decem- 
ber; and  the  stock  which  had  been  a  football  in  the  market  thus 
become  of  such  value  that  in  1 887  Gould  was  able  to  lay  before 
a  committee  of  Congress,  in  justification  of  the  terms  described,  a 
table  which  showed  for  1880  market  prices  of  Kansas  and  Union 
Pacific  stock  which  were  approximately  the  same.1 

It  was  to  Gould,  as  chief  owner  of  Kansas  Pacific  and  holder  of 
practically  all  of  the  Denver  Pacific  stock  outstanding,  that  the 
lion's  share  of  the  profits  went ;  but  Mr.  Gould  was  not  satisfied  with 
a  harvest  on  these  stocks  alone.  In  the  course  of  his  operations  he 
had  become  possessed  of  certain  branch  and  minor  roads  in  whole 
or  in  part.  Thus  he  held  $945,887  in  bonds  of  a  company  known  as 
the  St.  Joseph  &  Western  Railroad  Company,  and  5013  shares  of 
its  stock ;  $634,000  in  bonds  of  the  St.  Joseph  Bridge  Company ;  and 
$59,000  in  St.  Joseph  &  Denver  Pacific  Railroad  receivers'  certi- 
ficates ;  while  to  convince  the  Union  Pacific  directors  of  the  wisdom 
of  accepting  his  plan  of  consolidation  he  had  acquired  the  Missouri 
Pacific,  the  Kansas  Central,  and  the  Central  Branch  Union  Pacific 
railroads.2  The  earning  capacity  of  none  of  these  lines  was  large, 
that  of  the  Missouri  Pacific  being  the  greatest.  The  St.  Joseph  & 
Western  had  been  sold  in  foreclosure  in  1875,  and  had  continued  to 
be  managed  thereafter  by  a  receiver.  What  value  it  had  was  due 

1  Quotations  of  Kansas  Pacific  common  during  1879  (Chron.  1880) : 

January  February  March  April 

Low    High  Low    High  Low    High  Low    High 

9|     13  IlJ    22j  17     22$  20$    60 

May  June  July  August 

Low    High  Low    High  Low    High  Low    High 

5°      S9f  54        59  56        60  53!      59$ 

September  October  November  December 

Low     High  Low     High  Low     High  Low     High 

55        73i  70        85*  83$      92  85       92} 

1  United  States  Pacific  Railway  Commission  Report,  testimony  of  Jay  Gould. 


UNION  PACIFIC  231 

to  the  fact  that,  as  extended  to  Grand  Island,  it  gave  to  the  Union 
Pacific  an  outlet  to  the  East  other  than  the  one  at  Omaha.  The  value 
of  the  Bridge  Company  bonds  and  of  the  receivers'  certificates  was 
dependent  upon  this  same  property.  The  Kansas  Central  was  a 
narrow-gauge  road  and  had  been  sold  under  foreclosure  in  April, 
1879.  The  Central  Branch  Union  Pacific  had  been  designed  to 
join  with  the  Kansas  Pacific,  but  had  been  left  without  western 
connection  when  this  latter  road  had  failed  to  meet  the  Union  Pacific 
at  the  hundredth  meridian.  At  the  time  of  the  consolidation,  accord- 
ing to  the  United  States  Pacific  Railway  Commission,  "the  coupons 
for  six  years  were  in  default,  and  were  retained  uncancelled  as 
security  for  the  income  mortgage.  The  company  had  never  earned 
sufficient  to  pay  its  own  coupons,  without  taking  into  account  the 
accruing  interest  to  the  United  States  in  any  form."  l  The  Missouri 
Pacific  was  more  prosperous,  but  need  not  here  concern  us.  Mr. 
Gould  had  paid  various  prices  for  the  above,  ranging  from  $40 
for  the  St.  Joseph  &  Denver  bonds  to  $238  for  the  stock  of  the 
Central  Branch  Union  Pacific.  In  the  case  of  each  road  he  turned 
over  his  purchase  to  the  Union  Pacific  for  the  same  or  a  greater 
price.2  Thus  for  the  St.  Joseph  &  Western  bonds,  for  which  he 
had  paid  40,  he  received  par  in  Union  Pacific  stock  selling  as  high  as 
94  in  January,  1880;  for  $634,000  bonds  and  4000  shares  of  stock 
of  the  St.  Joseph  Bridge  Company,  costing  $480,440,  he  received 
6340  shares  of  Union  Pacific  stock;  for  $479,000  in  bonds  and  2521 
shares  of  stock  of  the  Kansas  Central,  he  received  4790  shares  of 
Union  Pacific;  and  for  7616  shares  of  Central  Branch  Union 
Pacific,  costing  $1,826,500,  he  received  $913,500  in  Union  Pacific  six 
per  cent  bonds  and  $913,500  in  Kansas  Pacific  six  per  cent  bonds.3 
The  result  was  the  issue  of  considerable  amounts  of  stock  of  the 
consolidated  and  bonds  of  the  consolidating  companies,  without  equi- 
valent value  received. 

The  Union  Pacific  Railway  Company,  therefore,  began  its  career 
in  1880  in  worse  shape  than  the  Union  Pacific  Railroad  Company, 
which  had  preceded  it,  for  it  suffered  not  only  from  an  initial  water- 
ing of  stocks  and  bonds,  but  from  a  watering  of  assets  which  had 

1  United  States  Pacific  Railway  Commission  Report,  1887,  p.  100. 

2  Except  the  Missouri  Pacific,  which  Gould  retained. 

3  United  States  Pacific  Railway  Commission    Report,    1887,   testimony  of  Jay 
Gould,  pp.  467-9,  523,  524. 


232  RAILROAD  REORGANIZATION 

followed.  Including  the  government  subsidy  and  accrued  interest 
thereon,  the  total  bonds  and  stocks  of  the  company  in  1880  were 
$179,058,902,  or  $98,329  per  mile,  of  which  $27,876  were  stock, 
$45,372  mortgage  bonds,  and  $25,081  government  subsidy  and  in- 
terest. The  figures  per  mile  were  slightly  lower  than  in  1870,  and  yet 
the  water  in  the  capitalization  was  more  abundant,  for  the  average 
value  of  the  assets  had  declined  still  more.  A  dividend-paying  road 
had  been  combined  with  non-dividend  payers,  with  the  result  of 
large  profits  to  the  promoters  of  the  consolidations,  but  of  serious 
harm  to  the  solvent  party. 

Between  1880  and  1883  a  number  of  branches  were  constructed, 
to  provide  funds  for  which  the  capital  stock  of  the  Railway  Company 
was  increased  $10,000,000.  Of  these  the  Denver  &  South  Park 
was  constructed  in  the  years  1881  to  1883,  and  was  the  last  of 
Mr.  Gould's  gifts  to  the  parent  line.  This  road  was  handled  by  several 
construction  companies,  in  the  last  of  which  Gould  took  a  quarter 
interest,  receiving  stock  of  the  Denver  &  South  Park  Railroad 
Company  as  a  dividend  on  his  investment.1  In  November,  1880,  act- 
ing in  behalf  of  the  Union  Pacific  Railway  Company,  he  bought  the 
stock  of  the  Denver  road  at  par  for  cash,  benefiting  in  his  capacity 
as  quarter  owner  by  his  action  as  representative  and  stockholder 
of  the  Union  Pacific.2  In  relation  to  the  road  Mr.  Charles  F.  Adams, 
Jr.,  subsequently  said :  "The  chief  source  of  revenue  .  .  .  was  in 
carrying  men  and  material  into  Colorado  to  dig  holes  in  the  ground 
called  mines,  and  until  it  was  discovered  that  there  was  nothing  in 
those  mines  the  business  was  immense."  3  A  more  important  and 
genuinely  beneficial  project  was  the  organization  in  1881  of  the 
Oregon  Short  Line  Railway  Company  to  construct  and  operate  a 
railway  from  Granger  on  the  Union  Pacific  to  and  into  the  state  of 
Oregon,  a  distance  of  610  miles,  with  the  intention  of  securing  the 
Washington  and  Oregon  business.  The  Northern  Pacific  was  in 
financial  difficulties  at  the  time,  and  it  was  not  expected  that  it  could 
anticipate  the  new  road ;  but  even  though  this  expectation  was  dis- 
appointed, and  the  Oregon  Short  Line  was  second  in  reaching  the 

1  United  States  Pacific  Railway  Commission  Report,  1887,  testimony  of  Charles 
Wheeler,  pp.  1735-6.    Amount,  $571,000. 

2  Ibid.  Testimony  of  John  Evans,  pp.  1853-4. 
8  Ibid.  Testimony  of  C.  F.  Adams,  p.  47. 


UNION  PACIFIC  233 

disputed  territory,  its  value  was  great  and  steadily  grew.1  The  road 
was  built  by  the  construction  department  of  the  Union  Pacific,  and 
was  financed  by  the  organization  of  a  subsidiary  corporation  which 
issued  stock  and  bonds  to  an  amount  of  $25,000  per  mile,  one-half 
of  the  stock  being  reserved  in  the  Union  Pacific  treasury  for  the 
purpose  of  control,  and  the  Union  Pacific  guaranteeing  the  pay- 
ment of  interest  on  the  bonds.  This  branch  at  least  was  not  un- 
loaded on  the  main  line  by  interested  parties,  and  forms  an  essen- 
tial part  of  the  system  to-day.  Other  branches  were  bought  or  con- 
structed at  the  time,  but  do  not  require  detailed  mention. 

Gould  for  the  time  had  obtained  from  the  Union  Pacific  all  that 
he  thought  possible,  and  quietly  unloaded  his  stock,  while  keeping 
up  the  payment  of  dividends.  By  1883  he  was  substantially  clear, 
but  he  had  left  his  mark;  the  consolidation  of  1880,  with  the  forced 
purchase  of  worthless  branches,  aided  as  it  was  by  the  high  capital- 
ization caused  by  extravagant  original  construction,  and  accom- 
panied by  a  steadily  increasing  intensity  of  competition  between 
transcontinental  lines,  had  diminished  the  surplus  to  a  dangerous 
extent.  At  the  same  time  the  prosperity  of  the  country  as  a  whole 
was  declining;  the  wheat  crop  of  1881  was  only  three-quarters  as 
large  as  the  crop  of  1880,  and  the  corn  crop  was  the  smallest  since 
1874;  though  the  decline  was  not  so  marked  in  Kansas  and  the  far 
West  as  in  the  states  east  and  south  of  Omaha  and  Kansas.  By 
1882,  says  Noyes,  all  the  markets  were  moving  downward,  and  after 
the  reaction  of  that  year,  the  volume  of  internal  trade  decreased 
continuously  until  after  the  panic  of  i884.2 

The  evidence  of  distress  on  the  part  of  the  Union  Pacific  was 
the  mounting  up  of  the  floating  debt.  In  November,  1882,  President 
Dillon  stated  that  it  then  amounted  to  $3,400,000,  and  that  a  loan 
of  $5,000,000  was  to  be  negotiated  to  take  care  of  it.3  The  annual 
report  at  the  end  of  the  year  stated  the  net  debt  to  be  only  $842,743, 
but  included  in  the  assets  used  to  offset  the  gross  debt  $2,768,437 
in  fuel  and  material  on  hand,  and  $927,648  in  balances  due  from 
auxiliary  roads;  so  that  early  the  following  year  it  was  again  a 
subject  of  discussion,  and  the  stockholders  recommended  to  the 
directors  the  issue  of  collateral  bonds  in  order  to  wipe  it  out.  Pur- 

1  United  States  Pacific  Railway  Commission  Report,  1887,  pp.  91  ff. 

2  Thirty  Years  of  American  Finance,  pp.  86  to  98.  *  Chron.  35:  578,  1882. 


234  RAILROAD  REORGANIZATION 

suant  to  the  recommendation  the  directors  executed  to  the  New 
England  Trust  Company  of  Boston  an  indenture  under  which  it 
proposed  to  issue  trust  bonds  to  an  amount  equal  to  90  per  cent  of 
the  securities  deposited.  By  1884  the  gross  floating  debt  amounted, 
nevertheless,  to  $11,306,595,  as  against  $9,852,325  gross  in  1882, 
and  the  quick  assets,  exclusive  of  fuel  and  material,  counted  up  to 
$8,068,898,  instead  of  to  $6,241,145.  The  chief  increase  in  liabilities, 
as  always,  had  taken  place  in  bills  payable,  meaning  that  the  road 
had  been  giving  its  notes  -for  the  payment  of  current  indebtedness, 
with  the  consequent  necessity  of  paying  a  high  rate  of  interest,  and 
of  making  frequent  renewals.  Meanwhile  dividends  had  been 
stopped  and  salaries  cut  down. 

At  this  juncture  Mr.  Sidney  Dillon  resigned  the  presidency,  and 
Mr.  Charles  Francis  Adams,  Jr.,  was  elected  his  successor.  Mr. 
Dillon  was  well  along  in  years,  was  said  to  be  in  poor  health,  and 
doubtless  missed  the  support  which  Mr.  Gould  had  been  accustomed 
to  render  him.  Mr.  Adams  was  a  younger  man,  only  forty-nine 
years  of  age  as  against  the  sixty-nine  of  Mr.  Dillon.  He  had  been 
a  member  of  the  Massachusetts  Railway  Commission  from  1869 
to  1879,  had  served  as  government  director  of  the  Union  Pacific 
in  1878,  and  now  brought  to  his  position  as  president  an  inexhaust- 
ible fund  of  energy,  large  resourcefulness,  and  more  important 
still,  a  nice  sense  of  his  obligations  towards  the  bondholders  and 
shareholders  of  his  road.  Under  his  regime  the  economies  earlier 
initiated  were  continued  and  extended ;  employees  were  discharged 
until,  by  June  28,  1884,  the  company  had  only  about  10,000  men 
in  its  employ  instead  of  the  20,000  who  had  been  on  the  rolls  at  one 
time;  and  rolling  mills,  etc.,  were  closed  wherever  the  company 
found  it  cheaper  to  purchase  rails  and  equipment  at  current  prices. 
This,  with  the  cessation  of  dividends,  left  a  considerable  surplus 
revenue  applicable  to  the  payment  of  the  floating  debt.  In  addition, 
bonds  and  stock  from  the  company's  treasury  were  sold  between 
January  i,  1884,  and  January  i,  1887,  for  which  $6,550,000  were 
obtained;  and  the  aggregate  of  resources  made  available  was 
$16,200,000,  of  which  $8,251,368  were  applied  to  the  floating  debt, 
$6,708,632  to  betterment  of  the  road  and  branch-line  construction, 
and  $1,240,000  to  increase  of  equipment.1  In  addition  the  proceeds 

1  United  States  Pacific  Railway  Commission  Report,  1887,  p.  67. 


UNION  PACIFIC  235 

from  land  sales  were  used  to  the  same  general  end.  In  August, 
to  reassure  investors,  President  Adams  stated  that  no  part  of  the 
floating  debt  was  pressing,  and  in  November  he  repeated  the  state- 
ment ;  the  truth  of  which  was  made  evident  by  the  payment  of  the 
last  bit  of  net  unfunded  indebtedness  on  August  22,  two  years  later. 
The  result  was  highly  creditable,  although  the  continued  cessation 
of  dividends  provoked  some  protest. 

Much  could  be  done  at  this  time  by  able  and  energetic  manage- 
ment ;  there  was,  however,  much  that  could  not  be  done ;  and  it  is 
to  this  that  we  must  attribute  Mr.  Adams's  failure  to  put  the  road 
in  a  permanently  stable  position.  For  first,  the  competition  which 
the  Union  Pacific  was  obliged  to  meet  was  constantly  increasing 
in  severity.  In  1881  the  Atchison,  Topeka  &  Santa  Fe  was  ex- 
tended to  a  junction  with  the  Southern  Pacific  at  Deming;  in  1883, 
in  the  language  of  the  annual  report,  "  Not  only  was  the  Rio  Grande 
completed  to  Ogden,  making,  in  connection  with'  the  Atchison, 
Topeka  &  Santa  Fe  and  the  Burlington  &  Missouri  extension 
of  the  Chicago,  Burlington  &  Quincy,  a  direct  competing  route 
with  the  Union  Pacific  from  Chicago  and  all  eastern  points  to  a 
common  western  terminus,  but  the  Northern  Pacific  also  was 
connected  through,  making  a  third  transcontinental  route."1  In 
1887  the  Atchison  built  450  miles  of  line  and  the  Chicago,  Rock 
Island  &  Pacific  was  scarcely  behind,  so  that  Kansas  and  Nebraska 
were  covered  with  a  network  of  lines,  which  transformed  the  natural 
local  traffic  of  the  Union  Pacific  into  competitive  business  of  the 
most  uncertain  kind.  At  the  same  time  the  profitable  high  grade 
business  was  giving  way  to  a  larger  volume  of  mineral  traffic,  and 
the  average  length  of  haul  was  increasing,  all  of  which  resulted  in  a 
decrease  of  about  45  per  cent  in  the  average  receipts  per  ton  mile 
between  1881  and  1890,  a  slow  increase  in  gross  earnings  which 
bore  little  relation  to  the  greatly  increased  volume  of  business  done, 
and  a  fluctuating  progress  of  net  earnings,  which  were  actually 
over  $3,000,000  less  in  1889  than  they  had  been  eight  years  before. 

And  second,  during  this  time  the  fixed  charges  of  the  Union 
Pacific  did  not  materially  decrease.  They  were  $7,626,626  when 
Mr.  Adams  assumed  the  presidency,  and  $7,309,142  five  years 

1  Annual  Report,  1884,  p.  5. 


236  RAILROAD  REORGANIZATION 

later ;  and  the  necessity  for  further  decrease  was  shown  by  the  fact 
that  the  total  net  income  of  the  road  was  $11,402,199  in  1884, 
$10,339,402  in  1889,  and  $9,561,673  in  1890.  What  Mr.  Adams  could 
do  he  did,  and  the  funded  debt  under  his  regime  decreased  from 
$90,760,582  in  1884  to  $82,090,585  in  1889,  and  to  $73,968,885  in 
1890 ;  the  company  steadily  buying  up  its  own  indebtedness :  but  the 
conditions  which  he  had  to  face  were  too  exacting,  and  the  saving 
made  here  was  offset  in  other  ways. 

To  save  itself  the  Union  Pacific  was  driven  to  a  rapid  extension 
of  its  branch  mileage,  which  Mr.  Adams  held  to  be  the  only  means 
by  which  fixed  charges  could  be  paid.1  Between  1884  and  1890 
3132.45  miles  were  built  or  acquired,  all  under  separate  organiza- 
tions, but  with  their  accounts  and  management  under  the  super- 
vision and  control  of  the  officers  of  the  parent  line ;  and  the  amount 
invested  in  branch-line  securities  was  raised  from  about  $28,000,000 
in  1881  to  $41,879,724  in  1892.  These  roads  reported  annual  de- 
ficits, which  were  either  paid  out  of  earnings  or  carried  as  floating 
debt.  The  report  of  the  Government  Directors  in  1891  declared 
that  $15,000,000  out  of  $21,400,000  of  floating  debt  were  the  result 
of  expenditures  and  advances  in  the  construction  of  branch  and 
tributary  lines  and  the  purchase  of  stock  in  such  lines  for  the  purpose 
of  control.2  But  speaking  in  1887,  Mr.  Adams  declared  the  branches 
to  be  worth  $5,000,000  a  year  to  the  main  line,  entirely  apart  from 
anything  which  appeared  in  the  accounts  of  the  branches  themselves, 
and  in  a  letter  to  the  Government  Directors  in  1884  he  said :  "The 
branches  and  auxiliary  lines  of  the  Union  Pacific  should  be  con- 
sidered the  only  real  security  the  Government  has  for  the  repayment 
of  its  indebtedness.  .  .  .  Were  it  not  for  these  branches  the  Union 
Pacific  would  be  confined  to  such  small  local  traffic  as  it  could  pick 
up  at  points  directly  upon  its  main  line;  and  to  its  share  of  the 
through  transcontinental  business  which  has  recently  been  sub- 
divided by  four  through  the  construction  of  competing  routes."  3 
The  most  important  of  the  branches  remained  the  Oregon  Short 
Line,  with  the  connecting  line  of  the  Oregon  Railway  &  Navigation 

1  United  States  Pacific  Railway  Commission  Report,  1887,  testimony  of  C.  F- 
Adams,  pp.  45-6. 

1  Chron.  53:  436,  1891.  8  Annual  Report,  1884,  p.  165. 


UNION  PACIFIC  237 

Company,  of  which  the  Union  Pacific  became  finally  possessed  in 
1 889.^  This  last  road  had  been  long  considered  the  natural  outlet 
of  the  Northern  Pacific  to  the  Pacific  coast,  but  had  been  leased 
by  the  Union  Pacific  in  1887  through  the  Oregon  Short  Line  with 
a  guarantee  of  6  per  cent  dividends  upon  its  stock  as  well  as  interest 
upon  its  bonds  for  999  years.  In  1889  negotiations  with  the  Northern 
Pacific  resulted  finally  in  the  sale  of  the  Oregon  Railway  &  Naviga- 
tion stock  held  by  Mr.  Villard  and  his  friends.  Pending  the  issue 
of  a  collateral  trust  mortgage  the  stock  was  deposited  with  a  trust 
company,  a  note  was  given  for  the  amount,  and  the  sum  was  carried 
as  floating  debt.  Whatever  the  value  of  the  property  to  the  Northern 
Pacific,  it  proved  of  great  worth  to  the  Union  Pacific,  providing  it 
with  an  independent  outlet  to  the  coast,  and  giving  it  a  haul  on  its 
main  line  of  over  800  miles  on  all  interchanged  traffic.  The  method 
of  payment  proved  a  dangerous  one,  however,  in  that  it  so  largely 
swelled  the  volume  of  the  Union  Pacific's  quick  liabilities. 

In  1891  Mr.  Gould  again  began  buying  Union  Pacific  stock. 
Mr.  Adams  therefore  resigned  late  in  the  year,  and  Mr.  Dillon  was 
elected  to  his  position.  The  time  was  not  ripe  for  expansion  of  any 
kind,  and  Mr.  Gould's  death  the  following  year  put  an  effectual 
check  on  any  schemes  which  he  might  have  entertained.  The 
immediate  problem  was  the  floating  debt,  swollen  to  unwieldy  pro- 
portions by  the  acquisition  of  branch  lines,  and  in  particular  by  the 
purchase  of  the  Oregon  Railway  &  Navigation  Company.  During 
1890  a  block  of  collateral  bonds  was  issued  and  sold,  but  the  re- 
mainder of  the  proposed  issue  was  kept  back  in  the  hope  of  a  better 
price.  While  waiting,  Mr.  Gould  devised  a  scheme  for  the  postpone- 
ment of  the  payment  of  these  and  of  other  quick  liabilities  by  the 
issue  of  three-year  collateral  notes,  to  be  underwritten  by  a  syndicate 
composed  of  himself  and  of  other  gentlemen  interested  in  the 
property.  These  notes  were  to  bear  6  per  cent,  and  were  to  be 
issued  at  92 J  to  such  holders  of  the  floating  debt  as  would  accept 
them,  the  syndicate  taking  care  of  the  balance.  The  authorized 
amount  was  to  be  $24,000,000,  of  which  $5,500,000  were  to  be 
issued  at  once.  The  plan  was  declared  operative  on  September  28, 
1891.  If,  now,  the  Union  Pacific  had  been  a  moderately  capitalized 
corporation,  with  fixed  charges  normally  well  below  its  earning 


238  RAILROAD  REORGANIZATION 

capacity,  and  if,  in  1894,  when  the  notes  were  to  mature,  the  market 
conditions  had  been  more  favorable  than  in  1891,  it  is  probable 
that  this  scheme,  temporary  as  it  was,  would  have  met  the  needs 
of  the  situation.  Since  neither  of  these  contingencies  occurred  the 
insufficiency  of  the  plan  may  be  said  to  be  in  part  the  misfortune 
of  the  Union  Pacific  and  in  part  its  fault.  It  was  a  particular  mis- 
fortune that  the  severest  panic  since  1873  should  occur  when  the 
road  was  staggering  under  a  load  which  it  could  scarcely  bear; 
but  it  was  altogether  a  fault  that  the  railroad  should  have  been  so 
burdened  as  to  be  able  to  lay  by  no  reserve  in  good  times  for  the 
hard  times  which  were  bound  to  come. 

In  1892,  therefore,  the  Union  Pacific  was  in  a  difficult  position. 
Its  capitalization  was  high;  its  earnings  had  shown  scarcely  any 
increase  for  five  years ;  its  surplus  had  not  been  sufficient  to  pre- 
vent the  accumulation  of  a  large  floating  debt ;  it  had  to  prepare 
to  raise  a  large  sum  of  money  in  two  years  for  the  payment  of  its 
short  time  notes;  and,  in  addition,  there  was  ahead  a  fact  of 
which  little  has  been  said  so  far,  —  the  maturing  of  the  government 
indebtedness. 

Briefly  sketched,  the  history  of  this  indebtedness  was  as  follows : 
The  Acts  of  1862  and  1864  had  provided  for  the  issue  of  govern- 
ment bonds  for  stated  amounts  per  mile  on  the  subsidized  portions 
of  the  system  in  aid  of  construction,  which  bonds  were  to  mature 
thirty  years  from  date  of  issue,  and  to  have  a  lien  on  the  property 
covered  second  only  to  the  first  mortgage  of  the  company.  The  rate 
of  interest  was  6  per  cent,  payable  to  the  bondholders  by  the  Govern- 
ment; and  in  1875  the  Supreme  Court  decided  that  the  company 
was  not  obliged  to  repay  to  the  Government  the  accruing  interest 
before  the  maturity  of  the  bonds.1  This  ruling  was  regarded  as  a 
victory  for  the  company,  but  meant  the  steady  piling  up  of  arrears 
of  interest,  lessened  only  by  the  retention  by  the  Government  of 
one-half  the  amounts  due  for  government  transportation,  and, 
under  the  Thurman  Act,  of  such  additional  sum  not  in  excess  of 
$850,000  as,  added  to  the  whole  compensation  for  government 
services  and  to  the  5  per  cent  of  net  earnings  set  aside  under  the 
Act  of  1862,  should  make  the  annual  contribution  equal  to  25  per 

1  91  U.  s.  72. 


UNION  PACIFIC  239 

cent  of  the  net  earnings  of  the  company,  unless  the  remaining  75 
per  cent  should  be  insufficient  to  pay  the  interest  on  the  first  mort- 
gage bonds;  in  which  case  the  Secretary  of  the  Treasury  was  au- 
thorized to  remit  a  portion  of  the  25  per  cent  of  net  earnings  required.1 
The  Thurman  Act  did  not  fulfil  expectations.  The  Supreme  Court 
in  1891  held  that  expenditures  for  new  construction  and  new  equip- 
ment could  not  be  deducted  from  gross  earnings  in  ascertaining 
net  earnings,2  but  the  road  met  hard  times  and  the  maximum  limit 
of  the  contributions  to  the  sinking  fund  was  not  attained,  and  in 
investing  the  fund  in  government  bonds  the  Secretary  of  the  Treas- 
ury was  compelled  to  pay  high  premiums,  thus  reducing  the  net  in- 
terest ;  so  that  from  the  beginning  to  1892  the  question  of  indebted- 
ness to  the  Government  occasioned  constant  dispute  and  litigation, 
introduced  uncertainty  into  the  affairs  of  the  railroad,  and  caused 
hard  feelings  between  it  and  the  Government.  In  1892  the  neces- 
sity for  some  settlement  was  near  at  hand.  The  principal  of  the 
government  debt  matured  as  follows: 


1895  $640,000 

1896  1,440,000 

1896  4,320,000 

1897  6,640,000 

1898  17,342,512 

1899  3,157,000 


November  i 
January  i 
February  i 
January  i 
January  i 
January  i 


Deducting  from  this  amount  the  sums  paid  to  the  Government 
and  the  company's  credits  for  mail  and  carriage,  and  adding  ar- 
rears of  interest,  the  sum  due  the  Government  at  the  last  of  1893 
was  approximately  $52,000,000.3  It  was  obviously  highly  difficult 
for  the  company  to  pay  this  sum  in  1892  or  1898  or  any  other  time, 
and  for  some  years  both  the  company  and  the  Government  had  been 
earnestly  discussing  schemes  for  refunding,  and  the  advantages  and 

1  Statutes  at  Large,  45th  Congress,  2d  Session,  chap.  96. 

2  The  Court  held  that  while  up  to  the  passage  of  the  Thurman  Act  expenditures 
for  improvements  could  be  deducted  from  gross  earnings  in  calculating  net,  the 
language  of  that  Act  seemed  to  preclude  the  deduction  of  any  charges  for  improve- 
ments or  betterments,  or  increase  of  permanent  value  of  the  works  in  any  manner 
whatever.    See  99  U.  S.  402;  99  U.  S.  455;  138  U.  S.  84. 

3  Report  of  the  Government  Directors  for  1893. 


240  RAILROAD  REORGANIZATION 

disadvantages  of  the  ownership  and  operation  of  the  road  by  the 
United  States.  Thus  in  1892  an  overwhelming  obligation  was  hang- 
ing over  the  Union  Pacific;  and  did  not  crush  it  only  because  the 
inability  of  the  road  to  pay  was  so  evident,  and  the  inadvisability  of 
government  ownership  was  so  strongly  believed  in,  that  every  one 
felt  that  the  necessary  concessions  would  be  made. 

In  1893  the  sinking-fund  8  per  cent  bonds  matured  to  the  amount 
of  $5,176,000,  and  were  partially  extended  and  partially  paid  off 
through  the  medium  of  an  underwriting  syndicate ;  but  this  was  the 
last  attempt  to  meet  indebtedness  coming  due.  During  the  year 
both  gross  and  net  earnings  fell  off  enormously,  owing  to  the  gen- 
eral depression  of  business,  and  particularly  to  the  stagnation  upon 
the  Pacific  coast.  Freight  rates  were  said  to  be  in  a  state  of  chaos; 
and  the  Union  Pacific  served  notice  that  it  would  withdraw  from 
the  Western  Passenger  Association  on  October  10.  As  the  year  wore 
on  the  continued  decrease  in  earnings  made  the  situation  desperate. 
"The  company  for  the  year  ending  December  31,  1892,"  said  Mr. 
John  F.  Dillon,  counsel  for  the  Union  Pacific,  in  November,  "had 
a  surplus  of  $2,000,000.  In  the  month  of  September  (1893)  there 
was  a  loss  of  net  revenue  of  $1,500,000  as  compared  with  the  pre- 
ceding year,  and  from  January  i  to  August  31  there  has  been  a 
falling  off  in  net  revenue  of  over  $2,500,000.  The  company  is  in- 
debted for  labor  and  materials  on  October  i  to  the  amount  of 
$1,500,000;  and  its  sinking-fund  and  interest  charges  for  September 
would  be  more  than  $1,000,000;  for  October  $750,000,  for  Novem- 
ber $850,000,  for  December  $1,000,000,  and  for  January  $i, 000,000. 
There  will  be  a  deficit  for  the  year  1893  of  at  least  $3,000,000 
and  the  company  is  without  money  or  means  to  meet  these  obliga- 
tions. .  .  ."  * 

Under  these  conditions  a  receivership  was  the  only  device  which 
could  prevent  the  dismemberment  of  the  system  and  protect  the 
interests  of  all  the  creditors;  and  accordingly,  on  application  of 
parties  friendly  to  the  company,  Messrs.  S.  H.  Clark  (president  of 
the  Union  Pacific),  O.  W.  Mink  (comptroller),  and  E.  E.  Ander- 
son (government  director),  were  appointed  in  October ; 2  Mr. 
Clark  taking  charge  of  the  operation  of  the  road,  and  Messrs.  Mink 

1  Chron.  57:  684,  1893.  2  Ibid.  57:  639,  1893. 


UNION  PACIFIC  241 

and  Anderson  of  the  financial  and  legal  business.1  One  month  later, 
on  application  of  the  Attorney- General,  Messrs.  John  W.  Doane 
and  Frederick  R.  Coudert  were  appointed  additional  receivers  to 
safeguard  the  government  interests  and  to  assist  the  other  receivers 
in  the  general  administration  of  the  property.2  These  gentlemen 
remained  in  office  until  the  reorganization  was  complete,  though 
various  portions  of  the  system  passed  from  their  jurisdiction  from 
time  to  time. 

The  appointment  of  receivers  closed  a  long  struggle  to  maintain 
the  solvency  of  the  road.  A  reorganization  was  now  in  order,  and 
in  this  it  was  to  be  possible  to  do  what  Mr.  Adams  had  not  been 
able  to  do,  —  namely,  to  rearrange  the  capitalization  of  the  road, 
thereby  permanently  lessening  the  fixed  charges  and  securing  a  re- 
serve of  earning  capacity  sufficient  to  avoid  bankruptcy  when  receipts 
for  any  cause  should  show  a  considerable  decrease.  This  was  the 
fundamental  condition  of  future  prosperity.  Besides,  the  debt  to 
the  Government  had  to  be  settled,  cash  raised  to  pay  the  floating 
debt,  including  the  three-year  notes  of  1891,  and  the  system  held 
together  so  that  its  earning  capacity  should  not  be  destroyed. 

As  might  be  expected,  it  was  the  debt  to  the  Government  which 
was  most  publicly  and  persistently  discussed.  There  seemed  to  be 
four  ways  in  which  this  might  be  handled : 

First,  the  Government  might  have  cancelled  the  obligation  and 
have  remained  satisfied  with  the  enormous  economies  which  it  had 
secured  in  the  transportation  of  mails  and  other  government  busi- 
ness. In  the  seven  years  between  1867  and  1873  alone  the  Quarter- 
master-General estimated  that  the  Union  Pacific  had  saved  the 
Government  $6,507,283  in  the  cost  of  moving  troops  and  supplies,3 
and  there  was  no  doubt  that  by  1896  the  investment  of  the  Govern- 
ment, with  interest,  had  been  many  times  regained.  But  it  was 
pointed  out  not  only  that  the  Union  Pacific  deserved  little  considera- 

1  Sen.  Com.  1896,  54th  Congress,  ist  Session,  Doc.  No.  314,  p.  42,  testimony  of 
E.  E.  Anderson.   For  bill  of  complaint  see  Report  of  the  Commissioner  of  Railroads, 
1894,  pp.  99-120. 

2  Ibid.  pp.  391-2,  testimony  of  O.  W.  Mink.   This  gave  to  the  Government  three 
out  of  the  five  receivers.    For  petition  of  the  Attorney-General  see  Report  of  the 
Commissioner  of  Railroads  for  1894. 

3  Chron.  16:  292,  1873. 


242  RAILROAD  REORGANIZATION 

tion,  in  that  its  earnings  had  been  wrongfully  diverted  from  the 
payments  demanded  by  the  Thurman  Act  by  the  manipulations  of 
Gould  and  others,  but  that  the  precedent  of  renouncing  a  just  claim 
would  be  an  extremely  bad  one  for  the  Government  to  set. 

Second,  the  Government  might  have  exacted  larger  payments 
to  the  sinking  fund,  and  have  extended  the  debt  at  an  unchanged 
rate  of  interest  until  it  should  be  automatically  discharged.  This 
was  the  proposal  of  Mr.  Hampton,  Commissioner  of  Railroads, 
who  suggested  the  amendment  of  the  Thurman  Act  as  follows: 
it  should  embrace  all  the  United  States  bond- aided  Pacific  rail- 
roads ;  it  should  compel  the  contribution  of  50  per  cent  of  net  earn- 
ings to  a  sinking  fund  instead  of  25  per  cent,  and  should  extend  the 
indebtedness  to  the  Government  until  discharged  as  provided.  If 
any  company  should  abandon  a  portion  of  a  subsidized  line  or  divert 
its  business  from  a  subsidized  to  an  unsubsidized  line,  that  com- 
pany should  transfer  the  conditions  which  were  attached  to  the 
former  to  the  latter,  in  order  to  protect  the  interests  of  the  United 
States  Government.1  The  weak  points  in  this  scheme  were  many. 
Among  them  may  be  pointed  out  the  fact  that  contributions  to  the 
sinking  fund  under  the  Thurman  Act  had  been  necessarily  invested 
in  government  bonds,  which,  in  view  of  the  premium  at  which  they 
were  necessarily  purchased,  yielded  a  very  small  return.  To  double 
the  contributions  would  have  been  to  double  the  amount  of  the  rail- 
road's funds  sunk  in  but  slightly  remunerative  investments ;  and  the 
Government  did  not  seem  inclined  to  permit  the  company  to  adopt 
the  only  practicable  alternative,  that  of  investing  its  sinking  fund 
in  its  own  securities.  Also,  Mr.  Hampton's  amendment  would  have 
continued  to  an  enhanced  degree  the  constant  suspicious  super- 
vision of  the  company  by  the  Government  which  had  been,  perhaps, 
the  chief  evil  result  of  the  Thurman  Act. 

Third,  the  Government  might  have  consented  to  a  refunding 
of  the  indebtedness  to  it  at  a  lower  rate  of  interest.  This  was  most 
urgently  pressed  by  representatives  of  the  road.  Mr.  A.  A.  H. 
Boissevain,  representing  the  Dutch  bondholders,  proposed  to  re- 
deem the  first  mortgage  by  the  securities  in  the  sinking  fund  so  far 
as  possible,  and  to  renew  the  rest  at  a  lower  rate  of  interest ;  —  after 

1  Report  of  the  Commissioner  of  Railroads,  1895,  p.  14. 


UNION  PACIFIC  243 

which  the  Government  was  to  be  given  a  loo-year  2  per  cent  bond 
for  the  principal  and  interest  of  its  claim.1  Attorney- General  Olney 
similarly  suggested  a  renewal  of  the  first  mortgage  bonds  at  a  rate 
of  not  over  5  per  cent,  and  an  exchange  of  ioo-year  2  per  cent  bonds 
for  the  government  claim ;  though  he  differed  somewhat  from  Mr. 
Boissevain  as  to  the  lien  which  these  bonds  should  have.2  Congress 
and  the  Government  Directors  in  1894  were  inclined  to  insist  on 
harder  terms.  The  latter,  in  their  annual  report,  proposed  that  the 
first  mortgage  bonds  be  paid  off  in  cash,  and  that  a  ioo-year  3  per 
cent  instead  of  a  2  per  cent  bond  be  given  to  the  Government,  with 
elaborate  pro  vision  for  a  sinking  fund ;  and  the  former  had  before 
it  in  the  Reilly  Bill  a  very  similar  suggestion.3  As  a  counter-propo- 
sition the  railway  company  offered  to  pay  off  the  first  mortgage 
bonds  in  cash  if  the  Government  would  take  a  5o-year  2  per  cent 
instead  of  a  3  per  cent  bond  for  its  claim.  "The  petitioners  further 
represent,"  it  said,  "that  it  will  be  utterly  impossible  to  obtain  the 
very  large  sums  referred  to  from  the  stockholders  unless  it  be  pos- 
sible to  offer  to  them  in  satisfaction  of  their  assessments  reasonable 
security  for  the  moneys  so  advanced.  At  a  meeting  recently  held, 
at  which  were  present  representatives  of  a  large  amount  of  the  stock 
of  the  said  company,  the  conclusion  was  reached  that  if  the  debt  to 
the  Government  could  be  funded  substantially  on  the  terms  of  the 
Reilly  Bill,  but  at  a  rate  of  interest  of  2  per  cent  per  annum  instead 
of  3  per  cent,  the  said  stockholders  would  endeavor  to  raise  the 
funds  needed  for  the  purpose  of  meeting  the  requirements  of  the 
Reilly  Bill."  4  Finally,  Mr.  Pierce,  on  behalf  of  the  Fitzgerald  Re- 
organization Committee,  proposed  that  the  Government  either  take 
4  per  cent  bonds  for  the  principal  of  its  debt,  and  preferred  stock 
for  the  interest,  carrying  into  the  settlement  with  the  Government 
the  scheme  which  was  found  best  adapted  to  the  satisfaction  of 
other  creditors ;  or  that  it  take  a  3  per  cent  first  mortgage  bond  for 
its  principal,  and  a  second  mortgage  non-interest-bearing  bond  for  its 
interest ;  or  that  it  accept  a  lump  sum  of  money  equal  to  the  value  of 
its  lien,  which  he  informally  estimated  as  50  per  cent  of  the  total 

1  Ry.  Rev.  34:  335,  1894. 

2  Chron.  58:  775,  1894.  3  Ibid.  60:  132,  1895. 
*  Report  of  the  Commissioner  of  Railroads,  1895,  pp.  9-10. 


244  RAILROAD  REORGANIZATION 

amount  due.1  The  plan  of  refunding  was  the  most  obvious  as  well 
as  the  most  practicable  of  all  suggestions.  It  had,  however,  the  dis- 
advantage from  the  point  of  view  of  the  Government  of  surrender- 
ing some  part  of  the  government  claim,  and  from  that  of  the  com- 
pany of  continuing  the  relations  of  the  Government  with  the  road. 

Fourth  and  last,  the  Government  might  have  demanded  pay- 
ment in  cash.  The  sum  which  the  company  would  have  had  to 
obtain  was  extremely  large,  but  the  accumulated  sinking  fund  re- 
duced it  considerably,  and  many  thought  that  the  balance  could  be 
raised.  In  March,  1896,  before  a  Senate  committee,  Mr.  John 
Rooney,  for  the  first  mortgage  bondholders,  proposed  that  the  Gov- 
ernment, through  a  commission,  should  buy  in  the  Union  Pacific 
at  foreclosure  sale,  should  issue  a  new  general  mortgage  at  a  lower 
rate  of  interest  than  the  existing  prior  liens,  and  should  pay  off  both 
the  first  and  the  government  mortgage  with  the  proceeds ;  —  the 
road  to  be  turned  over  to  the  subscribers.2  This  suggestion  took 
place  among  many  others  which  were  in  the  nature  of  a  compro- 
mise. Thus  the  reorganization  committee,  in  1895,  offered  to  pay 
the  principal  of  the  government  debt  provided  that  the  interest 
were  cancelled;3  and  Receiver  Anderson  proposed  in  1896  that 
the  company  pay  the  principal  of  the  debt  by  adding  funds  raised 
by  it  to  the  amount  of  the  sinking  fund,  and  settle  the  arrears  of 
interest  with  a  50-year  2  per  cent  bond.  Full  payment  in  cash  was, 
of  course,  what  the  Government  desired,  and  everything  short  of 
that  it  hesitated  to  accept;  but  equally,  of  course,  full  payment 
was  what  the  bondholders  of  the  road  were  most  unwilling  to  con- 
cede ;  and  hearing  after  hearing  took  place  before  committees  of  the 
Senate  and  of  the  House  without  definite  result. 

Meanwhile  the  general  reorganization  of  the  company  was  going 
on.  In  November,  1893,  the  various  interests  and  factions  of  the 
road  held  a  conference  in  New  York,  which  resulted  in  the  choice  of 
a  reorganization  committee  as  follows:  Senator  Brice,  chairman; 
Mr.  A.  H.  Boissevain,  for  the  foreign  holders ;  General  Louis  Fitz- 

1  Senate  Commission,  54th  Congress,  ist  Session,  Document  314,  testimony 
of  W.  S.  Pierce.  See  generally  the  report  of  this  committee  for  a  discussion  of  alter- 
natives from  the  government  point  of  view. 

1  Ibid.  Testimony,  pp.  451-2.  3  Chron.  60:  303,  1895. 


UNION  PACIFIC  245 

gerald,  president  of  the  Mercantile  Trust  Company,  for  the  Gould 
interests ;  Mr.  Carr,  for  the  estate  of  F.  L.  Ames ;  General  Dodge, 
for  the  Denver  and  Gulf  roads'  interests;  and  Colonel  H.  L.  Hig- 
ginson,  for  the  Oregon  Railway  &  Navigation  interests.1  Subse- 
quently Mr.  J.  P.  Morgan  accepted  a  place.2  This  committee  was 
the  only  comprehensive  one  appointed  until  1895;  but  numerous 
other  committees  sprang  up  to  represent  special  interests  of  one  kind 
or  another,  appearing  frequently  as  interest  on  new  classes  of  bonds 
was  defaulted,  and  having,  with  the  main  reorganization  committee, 
to  deal  specifically  with  the  payment  of  the  floating  debt  and  the 
reduction  of  fixed  charges.  Upon  the  ability  of  the  committees  to 
agree  depended  the  retention  of  the  Union  Pacific  in  something 
like  its  existing  shape. 

Aside  from  the  question  of  the  government  debt  there  seemed 
to  be  a  general  agreement  as  to  what  was  needed  to  be  done.  Every 
suggestion  contemplated  the  payment  of  the  first  mortgage  in  full 
and  the  reduction  of  the  interest  upon  the  junior  securities;  most 
included  with  this  an  assessment  on  the  stock,  and  one  at  least  pro- 
posed the  cancellation  of  the  guarantee  on  the  stock  of  the  Oregon 
Railway  &  Navigation  Company.3  The  principles  were  obvious. 
A  large  sum  of  money  had  to  be  raised  with  which  to  pay  the  float- 
ing debt  and  to  meet  possible  demands  by  the  Government.  This 
had  to  come  from  the  junior  securities  or  from  the  stock,  and  pre- 
ferably from  the  stock,  which  represented  ownership  in  the  enter- 
prise. On  the  other  hand,  reductions  in  fixed  charges  had  to  come 
from  the  junior  securities  as  the  youngest  interests  which  had  a  mort- 
gage lien.  Differences  of  opinion  occurred  upon  the  details.  Should 
there  or  should  there  not  be  a  foreclosure  ?  How  large  an  assessment 
was  required  ?  How  great  must  the  reduction  in  interest  charges  be, 
and  should  bonds  or  stock  or  both  be  given  to  the  junior  securities 
in  exchange  for  their  holdings?  Should  the  system  as  it  stood  be 
preserved,  or  should  certain  parts  of  it  be  let  go  ? 

In  June,  1894,  Mr.  Boissevain  stated  that  the  reorganization 
committee  thought  that  they  should  be  in  a  position  to  formulate  a 

1  Ry.  Times,  64:  732,  1893.    Mr.  Brice  was  also  a  member  of  the  Senate  Com- 
mittee on  Pacific  Railroads. 

2  Ry.  Age,  18:  883,  1893.  3  Ry.  Times,  65:  336,  1894. 


246  RAILROAD  REORGANIZATION 

complete  plan  of  reorganization  speedily  after  the  terms  of  the 
adjustment  of  the  debt  to  the  United  States  had  been  approved  by 
Congress.  "It  is  our  opinion  that  the  fixed  charges  of  the  reor- 
ganized company  .  .  .  should  not  exceed  $8,500,000  per  annum. 
Certain  classes  of  existing  bonds  secured  by  mortgage  on  portions 
of  the  system  cannot  be  and  should  not  be  disturbed,  as  they  are 
amply  secured  by  property  earning  the  interest  which  is  payable 
thereon.  Other  bonds,  however,  must  be  converted  in  whole  or  in 
part  into  securities  not  imposing  a  fixed  charge  upon  the  reorganized 
company.  While  the  reorganization  committee  has  not  approved 
of  any  definite  plan,  we  believe  that  holders  of  bonds  which  must  be 
disturbed  and  creditors  and  stockholders  interested  in  the  system 
can  be  provided  for  upon  an  equitable  basis  by  the  creation  of  the 
following  securities: 

(a)  An  issue  of  general  mortgage  bonds  (at  4  per  cent),  secured 
by  a  general  mortgage  covering  the  entire  system,  subject  to  such 
mortgages  as  cannot  be  disturbed,  and  to  the  lien  of  the  United 
States  upon  the  main  line  and  Kansas  Pacific  division  for  the  ad- 
justed debt. 

(b)  An  issue  of  5  per  cent  preferred  stock. 

(c)  An  issue  of  common  stock. 

The  plan  of  reorganization  would  require  provision  to  be  made 
to  take  up  the  trust  notes  secured  by  valuable  collaterals.  The  funds 
required  for  this  purpose  and  for  the  other  cash  requirements  of  the 
reorganization  would  be  met  in  part  by  a  reasonable  assessment 
upon  the  stockholders,  and  in  part  by  the  sale  of  new  securities."  f 
A  not  dissimilar  suggestion  was  made  by  the  Government  Direct- 
ors in  1894.  They  proposed  to  ascertain  the  minimum  net  earning 
power  of  the  railroad  or  railroads  to  be  reorganized,  and  to  issue  a 
blanket  mortgage  of  3  per  cent  i co-year  bonds  to  an  amount  such 
that  the  accruing  interest  would  not  exceed  the  net  earning  power. 
By  sale  of  a  portion  of  these  bonds,  together  with  a  $10  assessment 
on  the  stock,  and  the  use  of  the  moneys  and  securities  in  the  sinking 
fund,  they  would  have  paid  off  the  prior  liens,  and  then,  after  ex- 

1  Ry.  Times,  65 :  750,  1894.  The  reorganization  committee  stated  that  this  plan 
was  not  final.  They  concurred,  however,  with  Mr.  Boissevain  in  his  recommenda- 
tion of  the  above  scheme. 


UNION  PACIFIC  247 

changing  the  new  3  per  cent  bonds  for  the  government  claim,  they 
would  have  used  the  balance  to  retire  the  junior  securities,  adding 
preferred  stock,  so  much  as  necessary,  to  compensate  for  the  differ- 
ence in  yield  between  the  old  securities  and  the  new  ones  received. 
The  amount  of  securities  required  they  estimated  at  $150,000,000 
3  per  cent  bonds,  $20,000,000  preferred  stock,  and  $61,000,000 
common  stock ;  the  latter  exchanging  for  old  common  stock  at  par. 

Both  of  these  plans  contained  excellent  features,  chief  among 
which  were  their  provisions  for  the  raising  of  cash  and  their  use  of 
preferred  stock.  The  cash  which  Mr.  Boissevain  proposed  to  raise 
was  to  meet  the  floating  debt,  for  he  hoped  to  refund  the  government 
indebtedness ;  and  while  he  may  scarcely  seem  to  deserve  commenda- 
tion for  not  attempting  to  fund  the  quick  liabilities  as  well,  this  is 
not  the  case,  as  the  history  of  the  Union  Pacific  itself  can  demon- 
strate. The  Government  Directors  intended  to  use  the  cash  procured 
not  only  for  settling  the  floating  debt,  but  also  for  partially  retiring 
the  prior  liens,  so  under  their  scheme  an  assessment  was  quite  in- 
evitable ;  and  having  made  that  as  large  as  they  dared  they  are  not 
to  be  criticised  for  resorting  to  the  sale  of  securities  for  the  additional 
funds  required,  especially  since  these  securities  were  to  have  a  first 
lien  on  the  road.  As  regards  the  preferred  stock  it  is  not  clear  from 
his  statement  at  the  time  whether  Mr.  Boissevain  had  in  mind  the 
exchange  of  junior  securities  for  bonds  and  stock  or  some  for 
bonds  and  some  for  stock  alone,  but  subsequent  developments  show 
that  his  intention  was  the  former.  Thus  his  idea  was  the  same  as 
that  of  the  Government  Directors,  viz.,  to  give  the  junior  bondholders 
a  right  to  a  low  rate  of  interest  well  within  the  earning  capacity  of 
the  road,  and  to  join  with  this  the  right  to  a  higher  return  whenever 
the  road  should  earn  it.  Mr.  Boissevain's  estimate  of  the  maximum 
fixed  charges  which  the  road  could  safely  stand  was,  however,  high, 
and  the  plan  of  the  Government  Directors,  if  conservatively  carried 
out,  would  have  been  better.  Finally,  the  Government  Directors  con- 
templated foreclosure,  while  Mr.  Boissevain  did  not;  the  relative 
merits  of  the  plans  on  this  point  depending  largely  on  the  terms  which 
the  bondholders  could  be  induced  voluntarily  to  accept. 

During  1894  and  1895  discussion  was  active,  both  in  Congress 
and  out,  while  the  reorganization  committee  worked  over  the  scheme 


248  RAILROAD  REORGANIZATION 

which  Mr.  Boissevain  had  put  forward,  without  making  any  formal 
announcement  of  a  plan.  Everything  depended  on  the  terms  upon 
which  the  United  States  should  insist.  The  reorganization  committee 
hoped  for  a  refunding  of  the  government  debt  at  2  per  cent.  It  had 
suggested  that  it  would  raise  the  funds  to  pay  off  the  prior  liens  if 
Congress  would  take  a  2  per  cent  5o-year  bond  in  satisfaction  of 
the  government  claim,  would  extend  the  provisions  contained  in  the 
Reilly  Bill  to  a  committee  charged  with  the  duty  of  purchasing 
the  property  of  the  Union  Pacific,  and  would  grant  the  committee 
the  power  to  form  a  successor  corporation  for  the  general  purpose 
stated  in  the  Acts  of  1862  and  of  1864,  and  with  the  general  powers 
given  in  those  Acts,  together  with  the  same  rights,  privileges,  and 
freedom  of  action  that  were  exercised  and  enjoyed  by  other  rail- 
roads.1 Subsequently  it  had  offered  to  pay  the  principal  of  the  govern- 
ment indebtedness  in  cash,  providing  that  the  Government  would 
relinquish  all  claims  to  interest.2  If  either  of  these  propositions  was 
accepted  it  was  willing  to  go  ahead ;  while  if  both  were  refused,  and 
no  official  counter-proposition  was  made  by  the  United  States,  it 
seemed  idle  for  the  general  reorganization  committee  or  any  other 
committee  to  promulgate  a  plan. 

But  meanwhile  the  Union  Pacific  system  was  disintegrating; 
partly  from  the  efforts  of  the  receivers  to  rid  themselves  of  branches 
and  contracts  which  had  become  burdensome,  and  partly  through 
the  action  of  bondholders  of  subsidiary  roads  who  refused  to  wait 
for  the  slow  action  of  Congress,  and  insisted  on  foreclosure  of  their 
liens.  As  early  as  August,  1893,  ex- Governor  Evans,  a  prominent 
stockholder  of  the  Union  Pacific,  Denver  &  Gulf,  had  petitioned 
for  an  accounting  from  the  Union  Pacific,  alleging  that  the  branch 
was  being  bled  for  the  advantage  of  the  main  line.  When  receivers 
for  the  Union  Pacific  system  were  appointed  Mr.  Evans  petitioned 
for  a  separate  receiver,  and  was  granted  his  request.  Litigation 
followed,  and  an  attempt  was  made  to  get  Mr.  E.  E.  Anderson  ap- 
pointed as  co-receiver;  but  the  machinery  of  foreclosure  and  sale 
were  duly  put  in  motion  and  the  line  became  separated  from  the 
parent  company.  In  October,  1893,  in  view  of  an  impending  de- 
fault, the  Fort  Worth  &  Denver  City  Railway  Company  was  placed 

1  Chron.  60:  132,  1895.  2  Ibid.  60:  303,  1895. 


UNION  PACIFIC  249 

in  the  hands  of  receivers,  as  was  the  same  month  the  Denver,  Lead- 
ville  &  Gunnison  and  the  St.  Joseph  &  Grand  Island.  In  April, 
1894,  a  receiver  was  appointed  for  the  Leavenworth,  Topeka  & 
Southwestern ;  hi  June  one  for  the  Oregon  Railway  &  Navigation 
Company.  Foreclosure  proceedings  against  these  and  other  branches 
were  instituted,  and  were  attended  by  a  very  considerable  measure 
of  success.1  On  the  other  hand,  the  receivers  were  anxious  to  get 
rid  of  onerous  contracts  and  unprofitable  branches.  On  the  i6th 
of  March,  1894,  they  formally  abandoned  the  Leavenworth,  To- 
peka &  Southwestern.  In  July,  1894,  they  petitioned  to  be  relieved 
from  certain  guarantees  and  contracts,  and  asked  instructions  con- 
cerning the  operation  of  certain  lines.  Judge  Sanborn,  in  the  United 
States  Court  at  St.  Paul,  set  November  15  for  a  hearing,  and  ap- 
pointed a  special  master  to  take  testimony.  The  master  reported 
hi  October.  He  recommended  the  continuance  of  operation  of  most 
of  the  lines  in  question,  but  found  that  the  receivers  were  not  bound 
by  the  disputed  contracts;  and  in  November  Judge  Sanborn  con- 
firmed the  bulk  of  his  report.  The  net  result  was  a  reduction  in 
the  mileage  of  the  Union  Pacific  from  8167  in  the  latter  part  of  1893 
to  4469  in  May,  1895 ;  at  which  time  proceedings  against  the  Oregon 
Short  Line  Railroad  Company  threatened  to  withdraw  1424  miles 
besides. 

With  matters  in  this  state  the  reorganization  committee  was 
genuinely  discouraged  by  the  refusal  of  Congress  to  pass  the  Reilly 
Bill,  providing  for  a  refunding  of  the  government  debt ;  although 
this  had  been  reported  to  the  House  with  the  alternative  amend- 
ment proposed  by  the  committee  accepting  the  payment  in  cash  of 
the  principal  of  the  government  debt  in  full  satisfaction  of  claims 
against  the  company.2  Since  Congress  had  earlier  refused  a  pro- 
position to  pay  off  the  prior  liens  in  full  on  condition  that  the  govern- 
ment debt  be  refunded  at  2  per  cent,3  it  was  felt  that  nothing  but 
cash  payment  of  principal  and  interest  would  be  acceptable,  and 
this  the  committee  refused  to  undertake.  On  March  8  the  announce- 
ment was  made  that  the  reorganization  committee  of  the  Union 

1  For  a  summary  of  the  foreclosure  suit  pending  in  1895  see  the  Report  of  the 
Government  Directors  for  that  year. 

2  Chron.  60:  303,  1895.  *  Chron.  60:  132,  1895. 


250  RAILROAD  REORGANIZATION 

Pacific  road  had  abandoned  its  task  and  would  return  the  securities 
deposited  with  it,  and  a  few  days  later  the  actual  disbandment  took 
place.1 

Between  March,  1895,  and  the  following  October  little  progress 
was  made.  With  the  dissolution  of  the  general  reorganization  com- 
mittee disappeared  the  one  body  capable  of  formulating  a  compre- 
hensive scheme  and  of  securing  its  widespread  acceptance.  The 
committees  which  remained  represented  each  some  one  or  two  mort- 
gages, and  were  thus  confined  too  narrowly  in  their  sympathies  to 
command  much  confidence  from  bondholders  as  a  whole.  Late  in 
1895,  however,  new  interests  undertook  the  reorganization  of  the 
property,  and  another  general  committee  was  formed,  comprising 
General  Louis  Fitzgerald ;  Marvin  Hughitt,  president  of  the  Chicago 
&  Northwestern ;  Chauncey  M.  Depew,  president  of  the  New  York 
Central;  Jacob  H.  Schiff  of  Kuhn,  Loeb  &  Co.;  Oliver  Ames, 
director  of  the  Union  Pacific ;  and  T.  Jefferson  Coolidge,  Jr.,  pre- 
sident of  the  Old  Colony  Trust  Company.2  This  committee's  plan 
of  action  was  noteworthy  in  three  particulars.  First,  it  contemplated 
a  foreclosure  sale.  This,  it  is  true,  was  but  resignation  to  the 
inevitable,  for  foreclosure  suits  were  already  under  way,  and  an 
attempt  to  check  them  would  have  had  scarcely  a  possibility  of 
success.  Second,  it  made  no  definite  provision  for  the  government 
debt.  A  certain  amount  of  bonds  and  stock  were  reserved  from  the 
securities  proposed  to  be  issued  for  the  purpose  of  settling  the  gov- 
ernment claim,  but  the  exact  method  in  which  that  indebtedness 
should  be  treated  was  left  for  future  arrangement.  Third,  it  did 
not  attempt  to  meet  the  collateral  trust  notes  of  1891,  which  con- 
stituted so  large  a  portion  of  the  floating  debt.  "The  securities  em- 
braced in  these  trusts,"  it  declared,  "are  largely  those  of  companies 
which  have  already,  by  orders  of  court  made  in  the  original  general 
receivership,  or  in  independent  foreclosure  proceedings,  lost  in  part 
or  in  whole  their  character  as  parts  of  what  has  been  known  as  the 
Union  Pacific  system.  Independent  reorganization  of  many  of  these 
properties  are  pending.  The  purposes  which  brought  into  exist- 
ence guarantees  of  the  obligations  of  many  of  these  auxiliary  com- 
panies have  been  accomplished  by  construction  or  otherwise,  and 

1  Ry.  Rev.  35:  153,  1895.  2  Chron.  61 :  663,  1895. 


UNION  PACIFIC  251 

considerations  will  not  exist,  upon  reorganization,  for  continued 
relations  with  (them)  upon  the  basis  of  any  assumption  of  their 
fixed  charges."  l  Thus,  at  the  very  outset,  this  new  committee  re- 
moved the  three  matters  which  had  given  its  predecessors  the  most 
trouble.  The  proposed  foreclosure  made  it  both  easier  to  get  as- 
sents to  a  plan  and  more  difficult  to  block  its  operation;  the  post- 
ponement of  the  question  of  the  government  debt  allowed  the  com- 
mittee to  go  ahead  without  waiting  for  Congress ;  and  the  refusal  to 
provide  for  the  collateral  notes  relieved  it  of  many  difficulties,  and 
threw  the  holders  of  these  notes  back  upon  the  collateral  which  they 
had  exacted  as  security. 

The  plan  of  the  Fitzgerald  Committee  followed,  for  the  rest,  the 
general  lines  earlier  laid  down  by  the  Brice  Committee.  To  retire 
all  existing  mortgage  indebtedness  it  proposed  to  issue : 

First  mortgage  railway  land  grant  5o-year  4  per  cent  gold  bonds  $100,000,000 
4  per  cent  preferred  stock  75,000,000 

Common  stock  61,000,000 

The  reasoning  by  which  these  sums  were  arrived  at  was  as  fol- 
lows : 

The  lowest  net  earnings  the  Union  Pacific  Railway  had  ever  re- 
corded had  been  those  of  1894  $4>3i5»°77 

The  committee  planned  to  issue  $100,000,000  4  per  cent  5o-year 

bonds,  on  which  the  interest  would  be  4,000,000 

This  would  be  all  the  company  would  have  to  pay  in  any  one 
year. 

The  average  net  earnings  for  the  10  years  before  1894  had  been  $7,563,669 
To  the  $100,000,000  bonds  the  committee  proposed  to  add  $75,000,- 

ooo  preferred  stock.    The  annual  dividend  on  this  would  be        3,000,000 

Payment  on  bonds  and  preferred  stock  together  thus  equalled  the 
average  earnings. 

Net  earnings  between  1885  and  1894  had  gone  in  some  years  as 

high  as  $9,000,000 

To  the  above  bonds  and  stock  the  committee  wished  to  add  $61,- 
000,000  common  stock,  on  which  dividends  might  be  paid  if  it 
seemed  advisable. 

1  Chron.  61:  705,  1895.    (Reorganization  plan  in  full.) 


252  RAILROAD  REORGANIZATION 

New  common  stock  exchanged  at  par  for  old;  new  bonds  and 
preferred  stock  exchanged  for  old  bonds,  with  a  residue  which  was 
to  be  set  off  against  the  government  debt  and  to  be  used  for  cash 
requirements.  The  cardinal  principle  of  the  reorganization  was 
that  no  new  4  per  cent  bonds  should  be  issued  in  exchange  where  the 
old  mortgage  did  not  contribute  the  full  value;  or,  to  put  it  more 
accurately,  that  no  securityholders  were  to  be  given  the  right  to 
claim  a  sum  greater  than  their  property  could  earn  as  judged  from 
past  experience.  At  the  same  time  enough  preferred  stock  was  dis- 
tributed to  give  bondholders  the  same  returns  as  before  when  the 
road  should  earn  it.  A  $15  assessment  was  levied  upon  stockholders. 
This  was  several  times  the  quoted  price  of  the  stock  early  in  1896, 
but  was  not  more  than  the  stock  would  probably  soon  sell  for  after 
reorganization.  A  syndicate  agreed  to  advance  $10,000,000  to  $15,- 
000,000,  for  payment  of  coupons  as  they  fell  due  and  for  expenses,  in 
return  for  which  they  received  $5,000,000  in  preferred  stock  quoted 
at  59,  or  19  per  cent  on  a  capital  of  $15,000,000  at  current  prices. 
In  addition  the  bankers  who  managed  the  syndicate  received  $1,000,- 
ooo  in  preferred  stock ;  making  a  total  expenditure  of  $6,000,000,  a 
not  exorbitant  commission.  Besides  the  bonds  and  stock  for  strictly 
reorganization  purposes,  there  was  reserved  to  dispose  of  equipment 
obligations,  and  for  reorganization  and  corporate  uses,  $13,000,000 
in  4  per  cent  bonds  and  $7,000,000  in  preferred  stock.  Reorganiza- 
tion uses,  as  denned  by  Mr.  Pierce,  were  those  which  might  arise 
unprovided  for  and  of  an  extraordinary  character,  all  of  which  could 
not  be  foreseen.  Corporate  uses  were  those  which  would  be  proper  to 
the  corporation  thereafter,  such,  for  instance,  as  the  issue  of  secur- 
ities in  extension  of  the  property.1 

After  all  the  securities  of  the  old  corporation  had  been  accounted 
for  there  remained  $35,755,280  of  the  first  mortgage  bonds  and 
$20,864,000  of  preferred  stock  as  a  fund  or  resource  for  the  settle- 
ment of  the  government  debt ;  or,  in  round  numbers,  an  amount  of 
4  per  cent  bonds  equal  to  the  principal  of  that  debt  and  an  amount 
of  preferred  stock  equal  to  the  accrued  interest.  Just  how  this  was 
to  be  used  the  committee  did  not  pretend  absolutely  to  say.  "We 

1  See  testimony  of  W.  S.  Pierce,  Senate  Commission,  1896,  54th  Congress,  ist 
Session,  Document  314. 


UNION  PACIFIC  253 

desire  to  meet  any  proposition  of  the  Government,"  said  Mr.  Pierce, 
uor  to  suggest  any  proposition  which,  after  investigation,  we  believe 
will  meet  the  approval  of  the  Government  within  the  limits  of  the 
financial  possibilities  of  the  property  based  upon  this  plan.  In  other 
words,  we  have  made  no  sort  of  a  hard  and  fast  rule."  In  case  the 
Government  should  prove  obstinate  and  should  refuse  settlement 
on  reasonable  terms,  it  was  the  idea  of  the  committee  that  it  would 
be  entitled  on  foreclosure  to  its  share  as  a  second  mortgage  bond- 
holder only,  and  that  the  property  would  pass  under  the  sale  free 
from  all  liens,  including  that  of  the  United  States.  "  Our  view  upon 
that  point,"  said  Mr.  Pierce,  "is  that  when  the  Government  sub- 
ordinated its  lien  to  that  of  the  first  mortgage  bondholders,  it  did 
so  deliberately  and  in  terms  effective  for  that  purpose.  The  Govern- 
ment then  consented  to  all  remedies  that  were  necessary  for  the 
protection  of  this  prior  lien ;  and  an  indispensable  element  of  such 
priority  would  be  the  right  of  foreclosure.  And  unless  there  was 
a  concealed  purpose  on  the  part  of  the  Government,  that  right  of 
effective  foreclosure  was  undoubtedly  impliedly  granted."  l 

Subsequent  negotiations  with  the  bondholders  brought  a  reduc- 
tion in  the  proposed  issue  of  mortgage  bonds  from  $100,000,000  to 
$75,000,000,  affecting  the  Kansas  Pacific  consols  and  the  Union 
Pacific  Sinking  Fund  8s.  Thus  the  former  were  allotted  50  per  cent 
in  first  mortgage  45  and  1 10  per  cent  in  preferred  stock,  instead  of 
80  per  cent  in  45  and  50  per  cent  in  preferred  as  before ;  and  the  latter 
75  per  cent  in  45  and  100  per  cent  in  preferred  stock,  instead  of 
100  per  cent  and  50  per  cent  respectively.  This  reduced  the  proposed 
charges  $1,000,000,  and  proportionately  strengthened  the  scheme. 

On  the  whole,  the  plan  was  a  strong  one.  It  reduced  fixed  charges 
from  over  $7,000,000  to  under  $4,000,000,  with  an  eventual  lower 
limit  of  $3,000,000,  and  this  amount  such  good  authorities  as  Messrs. 
Mink  and  Clark  pronounced  the  road  safely  able  to  earn  in  spite 
of  the  reduction  in  its  mileage.2  During  the  receivership,  moreover, 
the  system  had  become  purged  by  the  cancellation  of  onerous  con- 
tracts and  the  lopping  off  of  unprofitable  branches,  and  though  some 
lines  were  lost  which  it  was  desirable  to  retain,  the  Union  Pacific  was 
not  precluded  from  the  repurchase  of  these,  and  did  in  fact  regain 

1  Testimony,  Senate  Commission,  1896,  p.  23.  2  Ibid. 


254  RAILROAD  REORGANIZATION 

the  most  important.  The  bondholders  were  put  in  no  worse  posi- 
tion than  before,  for  they  could  never  permanently  get  more  than 
the  earnings  of  the  road,  and  this  the  new  distribution  of  securities 
generally  assured  them.  The  position  of  the  common  stockholders 
was  improved,  for  whereas  between  1883  and  1893  fixed  charges 
had  only  once  fallen  below  $7,300,000,  now  less  than  $7,000,000 
were  to  be  taken  before  their  claims  were  heard,  while  both  the  gross 
and  the  net  earnings  of  the  road  promptly  regained  their  old  level. 
Finally,  the  general  principle  was  sound,  as  has  been  emphasized 
several  times  before.  It  gave  to  each  class  of  securities  a  claim  to 
interest  strictly  proportional  to  the  earning  capacity  of  the  road, 
and  added  to  this  a  preferred  stock  on  which  no  payment  was  to  be 
made  unless  earned ;  while  it  provided  for  a  liberal  assessment  upon 
stockholders,  and  attempted  no  funding  of  the  current  liabilities 
incurred  during  the  past  troubled  years. 

The  time  limit  for  deposits  under  the  plan  was  originally  set  at 
December  31,  1895.  It  was  then  extended  to  January  15,  1896, 
and  later  to  January  29  of  that  year.  By  January  8  the  reorganiza- 
tion committee  was  able  to  announce  that  it  had  secured  majorities 
of  all  of  the  first  mortgage  bonds  outstanding  except  an  inconsider- 
able shortage  in  one  class.  This  was  followed,  in  spite  of  some  oppo- 
sition among  London  brokers,  by  the  deposit  of  a  majority  of  the 
shares  of  the  company,  and  by  the  assent  of  other  securities.  In 
January,  1896,  in  a  letter  to  the  chairman  of  the  House  Commit- 
tee on  Pacific  Railways,  Mr.  Fitzgerald  stated  that  his  committee 
embraced  a  substantially  single  representation  of  all  Union  Pacific 
mortgage  bonds  in  circulation  except  those  held  by  the  United 
States.1 

Foreclosure  proceedings  had  been  long  under  way.  In  January, 
1897,  the  Government  agreed  to  join  in  them  in  consideration  of 
a  guarantee  of  a  bid  at  least  equal  to  the  original  amount  of  govern- 
ment bonds,  less  payments  made  by  the  company  to  the  Govern- 
ment, with  interest  at  3^  per  cent  per  annum.2  The  guarantee  was 

1  Chron.  62 :  187,  1896. 

2  Report  of  Commissioner  of  Railroads,  1897,  p.  8.   The  Government's  dealings 
with  the  reorganization  committee  followed  upon  the  defeat    in    the  House  of  a 
renewed  proposition  for  refunding  the  Government's  loan. 


UNION  PACIFIC  255 

to  be  of  cash,  so  that  the  Government's  relations  with  the  property 
would  terminate  completely  upon  confirmation  of  the  sale.  This 
was  the  first  affirmative  action  which  the  Government  had  taken, 
and  the  reorganization  committee  accepted  it,  despairing  of  better 
terms.  The  guaranteed  payment  was  in  part  offset  by  sinking-fund 
assets  of  $17,062,664,  leaving  a  net  amount  to  be  provided  of  $28,- 
691, 336. l  By  August,  1897,  foreclosure  of  the  main  line  had  been 
ordered  by  the  courts  in  all  the  states  through  which  the  Union 
Pacific  passed,  both  under  the  first  and  the  government  mortgages. 
Previous  to  this  the  plan  of  reorganization  had  been  declared  oper- 
ative, and  articles  of  incorporation  for  the  new  company  had  been 
filed ;  while  the  first  instalment  of  the  assessment  on  the  stock  was 
called  by  the  middle  of  the  month.  An  unexpected  development 
now  occurred.  Although  willing  to  join  in  foreclosure  proceedings, 
the  Government  found  the  decrees  of  foreclosure  to  some  extent 
unsatisfactory,  and  prepared  the  papers  for  an  appeal.  Objection 
was  particularly  made  to  the  fact  that  the  Omaha  Bridge  mortgage, 
amounting  to  about  $1,200,000,  was  adjudged  superior  to  the  lien  of 
the  Government  on  that  part  of  the  road  between  Omaha  and  Coun- 
cil Bluffs,  and  that  the  money  and  assets  in  the  hands  of  the  receivers 
accruing  from  the  operation  of  the  roads  were  ordered  to  be  sold 
instead  of  being  reserved  to  meet  a  deficiency  judgment  expected 
to  be  obtained.  Learning  this,  the  reorganization  committee  in- 
creased its  guarantee  by  over  $4,000,000,  making  the  total  guar- 
anteed bid  $50,000,000  instead  of  $45,754,060.  "This  increase," 
said  the  Attorney- General,  "removed  the  objections  to  the  decrees 
so  far  as  the  money  contents  were  concerned.  In  all  else  the  decrees 
were  just  and  satisfactory."  2  Even  so,  perhaps  partly  for  political 
reasons,  the  Government  was  not  ready  to  allow  a  sale,  and  later 
in  the  year  gave  notice  that  it  would  apply  for  a  postponement  to 
December  15,  in  order  to  give  Congress  an  opportunity  to  consider 
the  matter.  The  prospect  of  renewed  congressional  agitation  stim- 
ulated the  reorganization  committee  to  prompt  action.  "The  Com- 
mittee," it  declared,  "has  reached  the  conclusion  that  the  interests 

1  The  guarantee  was  provided   by  a  syndicate  with  the  same  personnel  as  that 
which  had  agreed  to  advance  the  money  for  reorganization  expenses. 

2  Chron.  65:  730,  1897;  Report  of  Commissioner  of  Railroads,  1897,  p.  9. 


256  RAILROAD  REORGANIZATION 

of  the  securityholders  represented  by  it  and  of  the  syndicate  fur- 
nishing the  funds  to  finance  the  reorganization  demand  reorganiza- 
tion without  any  further  delay.  In  this  situation  the  committee  con- 
templates ...  to  oppose  any  adjournment  of  the  sale  of  the  main 
line  and  to  bid  it  in,  if  need  be,  for  the  full  amount  of  the  Govern- 
ment's claim,  the  additional  sum  involved  in  this  being  $8,000,000."  l 
Postponement  of  the  sale  of  the  Kansas  Pacific  was  to  be  allowed, 
the  committee  meanwhile  making  up  its  mind  on  what  terms  to  bid 
it  in.  This  proposition  was  telegraphed  to  Washington  and  quickly 
accepted.  It  constituted  a  complete  surrender  on  the  part  of  the 
committee,  so  far  as  the  Union  Pacific  proper  was  concerned.  In- 
stead of  being  refunded,  the  government  debt  was  paid  off  in  cash ; 
instead  of  compromising  for  the  principal  alone,  both  principal  and 
interest  were  paid  in  full.  The  result  reflects  credit  on  the  sharp- 
ness of  the  Attorney- General,  but  the  method  was  scarcely  worthy 
of  the  Government  which  he  represented. 

November  ist  and  2d,  1897,  the  property  was  sold  under  fore- 
closure of  the  government  and  first  mortgage  liens,  and  the  prices 
were: 

For  the  Union  Pacific  main  line,  $40,253,605 

For  bonds  in  the  government  sinking  fund,  13,645,250 

$53,898,855 

In  addition  the  Government  received  in  cash  in  the  sinking  fund 
as  of  November  ist,  4,549,368 

$58,448,224 

In  addition  to  this  sum  the  committee  was  obliged,  under  its  agree- 
ment with  the  Government,  to  buy  up  the  first  mortgage,  amount- 
ing to  $27,637,436 
The  total  of  the  first  and  second  mortgages  was  67,891,041 
Adding  13,645,250 
Of  securities  purchased  for  cash,  the  total  payment  aggregated  over    8i,5oo,ooo2 

On  February  12,  1898,  the  reorganization  committee  bought  in 
the  Kansas  Pacific,  guaranteeing  for  the  Government  a  bid  at  the 
sale  which  should  equal  the  principal  of  the  government  debt,  i.  e. 
$6,303,000.*  Other  minor  roads  were  also  bought  back  on  fore- 

1  Ry.  Age,  24:  897,  1897. 

3  Report  of  the  Commissioner  of  Railroads,  1898,  p.  9. 

3  The  entire  indebtedness  of  the  Kansas  Pacific  to  the  Government  was  $12,891,- 
900.  After  the  sale  the  Government  brought  suit  for  the  balance,  but  received  a 
decree  for  $821,898  only. 


UNION  PACIFIC  257 

closure  sales,  and  from  time  to  time  as  the  mortgage  committee  sold 
the  collateral  back  of  the  trust  notes  of  1891  the  Union  Pacific  Rail- 
road Company  bought  portions  of  the  same.  In  1899  the  Union 
Pacific  stock  was  increased  $27,460,000,  and  the  new  issue  was  ex- 
changed share  for  share  with  Oregon  Short  Line  stock,  thus  regain- 
ing control  of  that  important  property.  Later  the  same  year  a  further 
increase  was  effected  to  retire  $14,000,000  Oregon  Short  Line  bonds 
and  $11,000,000  Oregon  Railway  &  Navigation  Company  preferred 
stock.  The  net  result  was  to  avoid  any  considerable  dismember- 
ment of  the  system.  Whereas  7673.59  miles  had  been  reported  for 
1892,  5399.01  were  reported  for  1899.  The  main  line  from  Port- 
land, Oregon,  to  Omaha  and  Kansas  City,  via  Ogden,  Cheyenne, 
and  Denver,  was  kept  intact,  the  principal  losses  being  of  branch 
lines  in  Nebraska  and  Kansas.1 

A  detailed  account  of  the  later  financial  operations  of  the  Union 
Pacific  divides  the  company's  recent  development  into  three  parts : 2 
First,  the  regaining  of  control  of  the  principal  auxiliary  systems  and 
branch  lines  which  the  receivership  had  temporarily  separated  from 
the  parent  stem ;  second,  the  purchase  of  large  amounts  of  stock 
in  the  Southern  Pacific  and  the  attempt  to  share  in  the  control  of 
the  Burlington,  which  latter  involved  the  purchase  of  Northern 
Pacific  stock  and  the  formation  of  the  Northern  Securities  Com- 
pany ;  and  third,  the  sale  of  the  stock  acquired  in  the  fight  over  the 
Burlington,  and  the  subsequent  purchase  of  Alton,  Atchison,  Bal- 
timore &  Ohio,  Illinois  Central,  and  other  stocks.  The  repurchase 
of  auxiliary  lines  has  just  been  alluded  to;  and  into  the  history  of 
the  Burlington  struggle  there  is  no  need  to  go  at  length. 

On  June  30,  1900,  the  Union  Pacific,  Oregon  Short  Line,  and 

1  Cf .  H.  R.  Meyer,  The  Settlements  with  the  Pacific  Railways,  Quarterly  Journal 
of  Economics,  July,  1899.  The  receivership  records  have  been  published  in  fourteen 
volumes. 

At  its  final  meeting  in  1898  the  reorganization  committee  nominated  a  proxy 
committee  of  five  members  "to  permanently  represent,  at  the  annual  and  other 
meetings,  such  holders  of  common  and  preferred  stock  as  (should)  desire  to  entrust 
their  proxies  to  the  said  committee  for  the  purpose  of  maintaining  the  management 
and  general  policies  inaugurated  by  the  reorganization  committee."  This  took  the 
place  of  a  compulsory  voting  trust. 

2  Thomas  Warner  Mitchell,  The  Growth  of  the  Union  Pacific  and  its  Financial 
Operations,  Quarterly  Journal  of  Economics,  vol.  21,  p.  569,  1907. 


258  RAILROAD  REORGANIZATION 

Oregon  Railroad  &  Navigation  Companies  operated  5427.89  miles 
of  line.  The  system  stretched  from  Kansas  City  and  Council  Bluffs 
to  Ogden,  and  reached  the  Pacific  coast  in  the  Northwest  at  Portland. 
It  had  no  rails  of  its  own  in  California,  but  was  dependent  on  the 
Southern  Pacific  tracks  for  connections  both  at  Ogden  and  at  Port- 
land. The  Southern  Pacific  extended  from  New  Orleans  through 
Texas,  New  Mexico,  and  Arizona  to  California,  and  thence  up  the 
coast  to  Sacramento.  At  Sacramento  it  divided ;  one  line  continued 
north  to  Portland,  and  one  turned  northeast  through  Nevada  to 
Ogden,  Utah.  Now,  in  1901  it  so  happened  that  the  Southern 
Pacific  was  for  sale.  Crocker,  Stanford,  and  Huntington,  who  had 
controlled  it,  were  dead,  and  their  successors  were  not  eager  to  re- 
tain the  railroad  as  an  independent  line.  Mr.  Harriman  seized  the 
opportunity.  In  1901  he  bought  for  the  Union  Pacific  750,000  shares 
out  of  a  little  less  than  2,000,000,  and  the  following  year  he  in- 
creased his  holdings  to  900,000.  The  Union  Pacific  financed  the 
purchase  by  the  issue  of  collateral  bonds.  The  acquisition  was  of 
vast  importance.  Not  only  did  it  afford  a  direct  connection  between 
Ogden  and  the  coast,  but  it  eliminated  one  of  the  Union  Pacific's 
four  great  competitors  in  transcontinental  business,  and  made  Mr. 
Harriman  the  dominant  figure  in  the  Southwest. 

North  of  the  Ogden- San  Francisco  line  the  conditions  were  less 
satisfactory.  The  Great  Northern  and  the  Northern  Pacific  were 
here  supreme,  and  in  1901  were  negotiating  for  the  purchase  of  the 
Burlington  to  give  them  an  entrance  into  Chicago.  Mr.  Harriman 
asked  for  a  share  in  this  purchase  but  was  refused.  He  thereupon 
began  to  buy  Northern  Pacific  stock  in  the  endeavor  to  secure  by 
this  a  half  control  in  the  more  eastern  road.  It  was  the  struggle  which 
then  ensued  between  Mr.  Harriman  and  Mr.  HiU  which  caused  the 
stock  exchange  panic  of  May,  1901,  and  which  resulted  in  the  forma- 
tion of  the  Northern  Securities  Company,  in  which  Mr.  Harriman 
was  allotted  a  large  though  not  a  controlling  interest.  On  the  break- 
up of  the  Northern  Securities  Company  the  Union  Pacific  received 
back  some  $25,000,000  in  Great  Northern  and  $32,000,000  in  North- 
ern Pacific  shares,1  worth  at  market  prices  about  $ioo,ooo,ooo.2 

1  Besides  $824,910  in  Northern  Securities  stubs. 

3  See  B.  H.  Meyer,  A  History  of  the  Northern  Securities  Case,  Bulletin  of  the 
University  of  Wisconsin,  July,  1906. 


UNION  PACIFIC  259 

This  Northern  Securities  episode  had  little  effect  on  traffic  condi- 
tions in  the  Northwest,  but  it  did  profoundly  influence  the  financial 
policy  of  the  Union  Pacific  during  the  following  years.1  The  dissolu- 
tion of  the  Northern  Securities  Company  gave  to  the  Union  Pacific 
Great  Northern  and  Northern  Pacific  shares,  which  were  valuable  as 
investments  only.  And  as  investments  these  stocks  soon  became 
undesirable.  We  have  said  that  the  combined  value  of  the  securities 
transferred  approximated  $100,000,000  at  the  time  of  transfer.  From 
that  time  on  the  stocks  appreciated  in  value  till  they  were  worth  from 
$145,000,000  to  $150,000,000,  and  yielded  an  income  of  less  than 
3  per  cent  on  their  market  price.  It  was  good  policy  to  sell  them,  and 
$118,000,000  worth  were  accordingly  disposed  of,  leaving  some 
$30,000,000  worth  still  in  the  hands  of  the  company.2  What  should 
be  done  with  the  enormous  resources  thus  secured  ?  Some  of  the  cash 
was  used  to  buy  Chicago  &  Alton  stock,  —  some  of  it  was  put  out  in 
demand  loans.  But  beginning  with  June  30,  1906,  the  Union  Pacific 
and  Oregon  Short  Line  began  investment  in  stocks  of  other  com- 
panies on  a  great  scale.  $41,442,028  were  put  into  Illinois  Central 
stock;  $10,395,000  into  Atchison  preferred ;  $45,466,960  into  Balti- 
more &  Ohio,  common  and  preferred ;  $19,634,280  into  New  York 
Central ;  and  lesser  amounts  into  Chicago,  Milwaukee  &  St.  Paul, 
Chicago  &  Northwestern,  St.  Joseph  &  Grand  Island,  and  other 

1  As  in  the  Southern  Pacific  purchase  the  acquisition  of   the  Northern  Pacific 
stock  was  financed   mainly  by  the   issue  of    convertible  collateral   bonds.    Some 
$30,000,000  besides,  it  is  supposed,  were  borrowed  from  the  banks. 

2  Testimony  of    Mr.   Harriman  before  the  Interstate   Commerce   Commission. 
It  is  true  that  the  Northern  Securities  stock  held  by  the  Union  Pacific  system  had 
been  pledged  as  security  for  an  equal  amount  of  Oregon  Short  Line  4  per  cent  and 
Participating  45,  and  that  when  these  bonds  were  refunded  there  was  pledged  for 
the  new  issue  whatever  the  Union  Pacific  interests  should  receive  in  exchange  for 
their  Northern  Securities  holdings,  and  any  other  shares  or  bonds  at  not  exceeding 
80  per  cent  of  their  appraised  value.   But  the  purchase  of  the  Southern  Pacific  and 
of  the  Northern  Pacific  stocks  had  been  previously  financed  by  an  issue  of  con- 
vertible collateral  bonds  for  which  other  collateral  had  been  pledged.    From  1904 
on,  the  rising  price  of  Union  Pacific  stock  made  conversion   desirable  and  rapidly 
released  the  securities  back  of  the  original  issue.    These  released  securities,  with 
$18,000,000  Southern  Pacific  preferred  stock  paid  to  the  Union  Pacific  in  1904 
(with  $2,460,960  cash),  proved  a  sufficient  pledge  for  the  Oregon  Short  Line  re- 
funding bonds,  and  the   Great  Northern  and  Northern  Pacific  stock  shares  were 
therefore  free  for  other  purposes. 


260  RAILROAD  REORGANIZATION 

companies.  In  all,  $131,693,271  were  invested  during  a  little  over 
seven  months.1  This  has  been  the  characteristic  feature  of  recent 
Union  Pacific  finance.  The  large  purchases  of  stock  in  other  roads 
have  assured  it  favorable  connections  in  the  Illinois  Central  and  in 
the  Baltimore  &  Ohio,  and  have  modified  the  severity  of  competition 
with  the  Atchison.2  Including  the  Southern  Pacific,  its  system 
reaches  from  Chicago  to  Portland,  San  Francisco,  Los  Angeles,  and 
the  Gulf,  and  has  an  influential  voice  in  two  of  the  principal  roads 
connecting  Chicago  with  the  Atlantic  seaboard.  At  the  same  time, 
the  extensive  investment  of  Union  Pacific  funds  to  secure  gains  uncon- 
nected with  increase  of  traffic  over  its  lines  has  provoked  merited 
criticism.  A  railroad  is,  after  all,  a  machine  for  transporting  pas- 
sengers and  goods,  not  an  engine  of  speculation ;  and  both  from  the 
point  of  view  of  the  community  which  it  serves  and  of  the  investors 
who  hold  its  securities  it  is  advisable  that  its  income  should  depend 
on  the  business  which  its  managers  conduct  and  are  responsible  for, 
and  not  on  circumstances  over  which  they  have  no  control.  So  far  as 
Union  Pacific  purchases  have  been  designed  to  open  connections  or 
to  modify  competition  they  have  had  a  sound  foundation.  So  far  as 
they  have  been  financial  operations  only  they  are  not  to  be  com- 
mended.3 

From  the  point  of  view  of  operation  the  success  of  the  Union 
Pacific  has  been  remarkable.  Like  most  roads  it  came  out  of  its 
receivership  in  better  shape  than  it  went  in,  but  with  much  lacking 
for  the  efficient  and  economical  handling  of  its  traffic.  Since  1900 
over  $52,000,000  have  been  invested  in  betterments  and  in  new 
equipment,  of  which  some  $15,000,000  have  been  withdrawn 
directly  from  income.  Maintenance  charges  have  also  been  liberal, 
particularly  in  the  last  few  years.  Grades  and  curves  have  been 
eliminated,  steel  bridges  have  been  put  in  place  of  wooden,  new  and 

1  Annual  Report,  1907.    See    also  Interstate  Commerce  Commission,  Report  in 
the  Matter  of  Consolidations  and  Combinations  of  Carriers,  Relations  between 
such  Carriers,  and  Community  of  Interests  therein,  their  Rates,   Facilities,  and 
Practices,  12  I.  C.  C.  Rep.  319. 

2  The  Union  Pacific  acquired  a  half   interest  in  the  San  Pedro,  Los  Angeles   & 
Salt  Lake  Railroad  Company  in  1904. 

3  Recent  reports  suggest  that  a  holding  company  is  to  be  formed,  which  will  take 
over  the  securities  now  owned  by  the  Union  Pacific  Railroad. 


UNION  PACIFIC  261 

heavier  rails  have  been  laid,  ballast  supplied,  and  equipment  greatly 
enlarged  and  improved.  Whereas  in  1896  13  per  cent  of  all  the 
Union  Pacific  system  was  laid  with  iron  rails,  and  only  24  per  cent 
had  rails  weighing  more  than  sixty  pounds  to  the  yard,  in  1907  there 
was  no  iron  reported,  and  only  33  per  cent  of  the  track  did  not  have 
rails  weighing  more  than  sixty  pounds  to  the  yard.  The  average 
capacity  of  freight  cars  was  a  shade  over  twenty  tons  in  February, 
1898;  it  was  over  thirty-four  tons  on  June  30,  1907,  and  the  new 
freight  cars  added  during  the  last-named  year  averaged  a  capacity 
of  sixty-seven  tons  apiece. 

In  consequence  of  these  improvements  the  Union  Pacific  has  been 
able  to  handle  a  very  greatly  increased  business.  Between  1899  and 
1907  the  tons  of  revenue  freight  carried  one  mile  increased  from 
1,393,207,990  to  5,704,061,535,  and  the  passengers  carried  one  mile 
from  167,117,388  to  680,278,509.  This  fourfold  increase  has  been 
packed  away  in  the  larger  cars,  which  hi  turn  have  been  combined 
into  longer  trains.  Twenty-onejx>ns  are  now  put  into  the  average 
freight  car,  and  thirty-two  freight  cars  form  an  average  train.  In 
i899~the  average  car  held  twelve  tons  and  twenty-nine  of  them  car- 
ried a  train-load.  Sixty-six  is  the  average  number  of  passengers  per 
train  to-day;  thirty-three  was  the  average  number  in  1899.  And  so 
the  increased  business  has  not  occasioned  a  proportionate  growth  in 
cost.  It  takes  but  little  more  than  three  times  the  outlay  in  conduct- 
ing transportation  to  do  over  four  times  the  work,  and  other  railroad 
expenses  have  varied  even  less. 

This  increased  business  and  less  rapidly  increasing  cost  has  meant, 
finally,  an  increase  in  profits,  and  explains  how  it  has  been  possible 
in  seven  years  to  take  $15,000,000  from  income  for  improvements 
besides  liberally  maintaining  the  property.  The  Union  Pacific  is 
prosperous  as  it  never  has  been  before.  In  1907  its  total  fixed 
charges,  in  round  numbers,  were  $8,600,000,  and  its  net  income  was 
$45,000,000.  Of  this  income  $23,500,000  were  paid  out  in  dividends, 
$1,960,000  appropriated  for  betterments,  additions,  and  new  equip- 
ment, and  $10,700,000  carried  to  surplus.  There  were  $69,000,000 
in  bills  payable,  incurred  since  1906,  in  part  for  improvements  and 
the  like,  but  largely  in  the  course  of  the  company's  financial  experi- 
ments ;  but  $75,000,000  in  convertible  bonds  have  been  authorized  to 


262  RAILROAD  REORGANIZATION 

cover  them.  Stock  and  bond  issues  are  much  larger  than  in  1899  and 
will  be  larger  still  when  the  new  convertibles  are  all  sold.  Fixed 
charges,  however,  are  less  than  $5,000,000  greater  than  they  were 
eight  years  ago.  In  order  to  imperil  bond  interest  net  earnings  will 
have  to  decline  by  81  per  cent ;  and  even  were  this  to  happen  it  is 
probable  that  some  margin  could  be  retained  by  a  decrease  in  the 
generous  sums  now  being  spent  for  the  maintenance  of  equipment 
and  of  road.1 

1  Dividends  upon  Union  Pacific  Railroad  Stock: 

Per  Cent 

1898         1899         1900         1901-4         1905         1906         1907 
Common  3i  4  4$  8  10 

Preferred  i$  3$  4  4  4  4  4 


CHAPTER  VIII 
NORTHERN  PACIFIC 

Act  of  1864  —  Failure  and  reorganization  —  Extension  into  the  Northwest  —  Vil- 
lard  and  the  Oregon  &  Transcontinental  Company  —  Lack  of  prosperity  —  Re- 
funding mortgage  —  Lease  of  Wisconsin  Central  —  Financial  difficulties  —  Receiv- 
ership —  Legal  complications  —  Reorganization  —  Subsequent  history. 

THE  Northern  Pacific  Railroad  Company  was  chartered  in  1864, 
and  failed  in  1875  and  in  1893.  Besides  these  bankruptcies  it  has 
been  in  frequent  financial  difficulty,  and  on  the  whole  furnishes  an 
instructive  chapter  in  a  study  of  reorganizations. 

The  Act  of  July  2,  1864, 1  empowered  the  Northern  Pacific  corpor- 
ation to  build  a  line  from  some  point  on  Lake  Superior,  in  the  state 
of  Minnesota  or  Wisconsin,  westerly  on  a  line  north  of  the  45th 
degree  of  latitude,  to  a  point  near  or  at  Portland,  Oregon.  It  pro- 
vided for  organization  on  subscription  for  20,000  shares  out  of  an 
authorized  capital  of  1,000,000  shares  with  10  per  cent  paid  in,  and 
granted  forty  alternate  sections  of  public  land  per  mile  through- 
out the  territories,  and  twenty  alternate  sections  throughout  the 
states  across  which  the  road  should  pass.  This  liberal  donation  was 
influenced  in  part  by  the  fact  that  the  value  of  lands  in  the  North- 
west was  then  low,  and  in  part  by  the  refusal  of  any  money  subsidy. 
The  Government  was  to  issue  patents  on  the  completion  of  stretches 
of  twenty-five  miles  built  in  "good,  substantial,  and  workmanlike 
manner,"  and  was  to  survey  lands  for  forty  miles  on  each  side  of  the 
line  2  as  fast  as  the  construction  of  the  road  should  require.  The 
company  was  to  begin  work  within  two  years  and  was  to  finish  the 
line  within  twelve  years,  and  it  was  provided  that  in  case  of  non- 
fulfilment  of  these  conditions  Congress  could  do  "any  and  all  acts 
and  things  which  (might)  be  needful  and  necessary  to  insure  a 
speedy  completion  of  the  road."  A  section  which  gave  trouble  till 

1  Entitled  An  Act  granting  Lands  to  aid  in  the  Construction  of  a  Railroad  and 
Telegraph  Line  from  Lake  Superior  to  Puget's  Sound,  on  the  Pacific  Coast,  by 
the  Northern  Route.  Statutes  at  Large,  38th  Congress,  ist  Session,  chap.  217. 

8  To  make  possible  the  selection  of  indemnity  lands. 


264  RAILROAD  REORGANIZATION 

amended  forbade  the  issue  of  mortgage  or  construction  bonds,  or  the 
making  of  a  mortgage  or  lien  upon  the  road  in  any  way  except  by  the 
consent  of  the  Congress  of  the  United  States.  The  company  was  to 
obtain  the  consent  of  the  legislature  of  any  state  before  commencing 
construction  through  it,  and  finally  the  Act  was  to  be  void  unless 
bona  fide  subscriptions  of  $2,000,000  to  the  stock,  with  10  per  cent 
paid  in,  should  be  obtained  within  two  years. 

A  project  so  daring  as  the  construction  of  a  railroad  through  the 
unsettled  Northwest  not  unnaturally  found  it  difficult  to  obtain 
financial  support.  The  capitalists  who  at  first  undertook  the  work 
were  unable  to  carry  it  through.1  In  1869  and  1870  two  developments 
occurred:  the  prohibition  of  bond  issues  contained  in  the  act  of 
incorporation  was  removed,  and  Jay  Cooke  became  interested  in  the 
building  of  the  road.  Both  facts  were  of  far-reaching  importance. 
Mr.  Cooke  was  one  of  the  foremost  financiers  of  his  time.  He  was 
a  man  of  great  personal  energy,  large  fortune,  and  extensive  personal 
following,  and  was  admirably  adapted  to  the  promotion  of  the  work 
in  hand.  The  removal  of  the  prohibition  upon  bond  issues  made  it 
possible,  with  his  support,  to  secure  some  funds  from  a  mortgage 
issue  and  to  allow  construction  to  begin. 

In  1869  Jay  Cooke  &  Company  were  appointed  financial  agents 
of  the  Northern  Pacific  Railroad  Company.  On  July  i,  1870,  issues 
of  $100,000,000  in  7.3  per  cent  first  mortgage  bonds  and  $100,000,000 
in  stock  were  authorized.  The  bonds  were  to  be  sold  to  the  agents 
at  88 ;  the  bulk  of  the  stock  was  to  go  to  the  agents  as  bonus  or  to 
the  syndicate  interested  with  them.  The  same  parties  agreed  to  raise 
$5,000,000  in  cash  within  thirty  days,  in  order  to  commence  the 
building  of  the  line.  This  made  a  fair  start  possible,  and  by  May, 
1873,  over  five  hundred  miles  had  been  completed.  The  situation 
was  nevertheless  a  difficult  one  because  of  the  reluctance  of  capitalists 
to  invest  in  the  new  first  mortgage  bonds.  In  1870  extensive  plans 
were  made  to  interest  the  European  markets,  but  all  in  vain  because 
of  the  outbreak  of  the  Franco- Prussian  war.  In  America  a  similar 
campaign  was  not  much  more  successful.2  The  high  price  asked  for 

1  Josiah  Perham  was  the  prime  mover  at  first  and  after  him  certain  Boston  capi- 
talists were  prominent. 

2  Ellis  Paxsom  Oberholtzer,  Life  of  Jay  Cooke.   Philadelphia,  George  W.  Jacobs 
&  Company,  1907.    See  also  Smalley,  History  of  the  Northern  Pacific: 


NORTHERN  PACIFIC  26$ 

the  bonds,1  the  uncertain  nature  of  the  enterprise,  the  not  altogether 
ill-founded  rumors  of  extravagance  and  mismanagement  of  the  con- 
struction actually  under  way,  the  presidential  election  of  1872,  all 
hindered  rapid  sales.  Failure  to  sell  bonds  meant  financial  stringency 
for  the  Northern  Pacific.  Operating  expenses  were  high,  and  the 
interest  on  outstanding  indebtedness  was  considerable.  On  the  other 
hand,  earnings  were  very  small.  No  through  business  could  be 
secured  till  the  completion  of  the  road  at  least  to  the  Snake  River, 
and  local  traffic  was  yet  to  be  developed.  As  a  result,  the  company 
borrowed  more  and  more  from  Jay  Cooke  &  Co.,  and  that  firm 
soon  found  itself  heavily  involved. 

On  September  18,  1873,  Jay  Cooke  &  Co.  closed  its  doors.  The 
shock  to  the  railroad  was  great.  The  quotations  of  first  mortgage 
bonds  dropped  from  par  to  about  n.  For  a  time  the  company  strug- 
gled on.  In  December,  1873,  a  funding  of  interest  was  carried 
through,  whereby  all  coupons  up  to  and  including  that  of  January 
i,  1875,  were  made  exchangeable  for  five-year  7  per  cent  coupon 
bonds,  convertible  into  the  company's  first  mortgage  bonds  at  par, 
and  into  the  company's  lands  at  25  per  cent  off  from  the  regular 
prices.2  In  April,  1874,  settlement  was  made  with  Jay  Cooke  &  Co. 
by  the  transfer  of  the  railroad's  first  mortgage  bonds  and  other 
securities.3  These  measures  offered  only  temporary  relief.  Busi- 
ness was  at  a  standstill  throughout  the  country.  Gross  earnings 
for  the  year  ending  June  30,  1874,  were  reported  to  be  $988,131, 
while  $30,780,904  7.3  per  cent  bonds  had  been  issued,  and  the 
floating  debt  stood  at  $777,335.  The  Northern  Pacific  was  not  only 
unable  to  meet  its  fixed  charges,  but  was  in  default  by  a  margin 
which  it  was  hopeless  to  attempt  to  overcome.  The  original  pro- 
ject had  completely  failed ;  and  the  only  means  of  continuing  the 
enterprise  seemed  to  lie  in  a  government  guarantee  of  the  railroad's 
bonds,  or  in  a  reorganization  so  drastic  as  to  sweep  away  fixed  charges 
and  to  give  the  company  a  fresh  start. 

In  May,  1874,  the  first  plan  was  tried.  A  bill  was  introduced  into 
Congress  providing  that  the  company  should  be  authorized  to  issue 

1  The  notes  were  put  on  the  market  at  par,  though  sold  to  the  syndicate  at  88. 

2  Chron.  18:  16,  1874. 

3  R.  R.  Gaz.  6:  135,  1874.  The  indebtedness  of  the  Northern  Pacific  to  Jay 
Cooke  &  Co.  amounted  to  about  $1,500,000. 


266  RAILROAD  REORGANIZATION 

0 

its  5  per  cent  thirty-year  bonds  for  $50,000  per  mile  on  its  entire 
line,  complete  and  incomplete,  and  that  on  completed  sections  of 
the  road  twenty  miles  long  it  should  deliver  its  7.3  per  cent  bonds  at 
a  rate  of  $50,000  per  mile,  receiving  in  return  $40,000  of  the  5  per 
cent  bonds  with  interest  but  not  principal  guaranteed  by  the  Govern- 
ment, which  should  hold  the  difference  of  $10,000  as  a  reserve 
fund.  Holders  of  outstanding  7.3  per  cent  bonds  were  to  have  the 
right  of  exchanging  their  bonds  for  new  55  on  the  same  terms.1  In 
return  for  the  guarantee  the  railroad  was  to  surrender  to  the  United 
States  Government  its  entire  land  grant,  to  be  sold  under  the  direc- 
tion of  the  Secretary  of  the  Interior,  and  to  turn  over  semi-annually 
its  entire  net  earnings.  The  Government  was  to  have  the  right  in 
addition  to  sell  the  Northern  Pacific  5  per  cent  bonds  whenever  the 
combined  yield  of  the  land  grant  and  the  net  earnings  should  not 
equal  the  interest  guaranteed.  Finally,  Congress  was  to  have  power 
to  fix  fares,  etc.,  provided  that  the  government  control  did  not  im- 
pair the  security  of  the  bonds.  In  brief,  the  capitalists  who  had 
involved  themselves  in  Northern  Pacific  affairs  were  ready  to  sur- 
render their  whole  enterprise  to  the  Government  if  the  Government 
would  carry  it  through.  But  Congress  was  so  little  willing  to  take 
the  responsibility  that  the  bill  never  came  to  a  vote. 

Early  in  1875,  while  the  application  for  government  aid  was  still 
pending,  the  directors  called  a  general  meeting  of  the  bondholders. 
When  it  assembled  President  Cass  made  a  statement  of  the  finan- 
cial condition  of  the  company.  The  outstanding  debt,  said  he,  was 
$30,441,300.  Of  the  7.3  per  cent  bonds  issued  as  collateral  for  float- 
ing debt,  mostly  in  1875,  there  had  been  pledged  $1,780,300  at  the 
rate  of  from  twenty-five  to  forty  cents  on  the  dollar.  The  interest 
on  land  warrants,  bonds,  and  scrip  given  in  funding  of  coupons 
amounted  to  $732,632.  The  floating  debt  was  $634,758,  of  which 
$150,000  were  arranged  for  settlement  within  a  few  days ;  and  $250,- 
ooo  were  due  to  directors  for  money  advanced  to  finish  the  Pacific 
section  after  the  failure  of  Jay  Cooke  &  Co.  in  1873.  The  total  net 
earnings  to  date  had  been  $124,056,  and  the  capital  stock  was  $25,- 
497,600.  By  this  report  it  seems  that  some  slight  advance  had  been 

1  R.  R.  Gaz.  6:  496,  1874;  Congressional  Record,  43d  Congress,  ist  Session,  May 
u,  1874,  pp.  3749,  3773- 


NORTHERN  PACIFIC  267 

made  since  June,  1874,  but  in  no  measure  which  afforded  any  hope 
for  the  continued  solvency  of  the  company.  Most  instructive  were 
the  figures  for  the  floating  debt,  which  hi  less  than  five  years  had 
increased  to  a  sum  more  than  five  times  the  net  earnings  for  the 
whole  period.  After  some  discussion  the  bondholders  elected  a 
committee  of  seven  to  report  at  a  future  meeting.  The  committee 
recommended  a  receivership,  the  directors  did  not  oppose,  and  on 
April  1 6  General  Cass  was  appointed  receiver,  resigning  his  position 
as  president  to  accept. 

By  this  time  hope  of  government  aid  had  vanished,  and  no  time 
was  lost  in  accepting  the  alternative  of  a  drastic  reorganization. 
Late  in  May  the  bondholders'  committee  reported  a  plan  which 
was  considered  by  the  bondholders  at  subsequent  meetings.  The 
principle  was  simple,  and  the  means  sufficient.  The  company  had 
earned  .4  per  cent  on  its  funded  debt :  —  ergo,  the  funded  debt 
was  to  be  swept  away.  Fixed  charges  had  been  heavy:  —  they 
were  now  to  be  completely  removed.  Scarcely  less  would  have  met 
the  needs  of  the  situation,  but  the  merit  in  refusing  to  tinker  and 
experiment  was  considerable.  In  more  extended  shape  the  plan 
was  as  follows :  Reorganization  was  to  be  carried  out  through  fore- 
closure, and  a  committee  of  six  was  appointed  to  take  charge.  All 
outstanding  bonds  were  to  be  replaced  by  preferred  stock,  and  all 
common  stock  was  to  be  exchanged  for  new  common  stock.  Float- 
ing debt  was  to  be  likewise  exchanged  for  preferred  stock,  which 
was  to  be  issued  to  the  amount  of  $51,000,000  for  the  following 
purposes : 

(a)  To  retire  the  principal  of  the  outstanding  7.3  per  cent  bonds, 
and  the  interest  to  and  including  July  i,  1878,  at  8  per  cent,  currency. 

(b)  To  retire  the  land  warrant  bonds,  principal  and  interest,  to 
and  including  January  i,  1875. 

(c)  To  pay  the  floating  debt  not  protected  under  the  existing  orders 
of  the  court. 

(d)  Generally  for  the  purpose  of  carrying  the  plan  into  effect. 
Preferred  stock  was  to  have  ah*  rights  and  privileges  of  common 

stock,  with  the  right  to  vote,  and  was  to  be  entitled  to  8  per  cent 
out  of  net  earnings  before  anything  should  be  paid  on  the  common, 
and  to  one-half  the  surplus  after  8  per  cent  should  have  been  de- 


268  RAILROAD  REORGANIZATION 

clared  on  both  preferred  and  common.1  It  was  to  be  convertible 
at  par  into  any  lands  belonging  to  the  company,  or  thereafter  to 
belong  to  it,  east  of  the  Missouri  River  in  the  state  of  Minnesota 
or  the  territory  of  Dakota,  until  default  should  occur  in  some  of  the 
provisions  of  the  new  first  mortgage  bonds,  and  the  proceeds  of 
all  sales  of  such  land  were  to  be  used  in  extinguishing  the  stock. 
Common  stock  was  to  be  issued  to  the  amount  of  $49,000,000,  and 
was  to  be  given  to  old  stockholders  share  for  share.  To  provide 
the  means  to  complete  and  to  equip  the  road  there  were  to  be  issued 
first  mortgage  bonds  not  to  exceed  an  average  of  $25,000  per  mile 
of  road,  actually  completed  and  accepted  by  the  President  of  the 
United  States,  to  be  secured  by  a  first  mortgage  on  the  whole  line 
of  road,  constructed  or  to  be  constructed,  and  on  the  equipment, 
property,  lands,  and  franchises,  including  the  franchise  to  be  a  cor- 
poration, subject  only  to  the  right  of  the  holders  of  the  preferred 
stock  to  convert  their  stock  into  lands.  The  principal  was  to  be 
payable  in  forty  years,  and  the  interest  and  sinking  fund  might  be 
made  payable  in  gold.  No  other  bonds  were  to  be  issued  except 
on  a  vote  of  at  least  three-quarters  of  the  preferred  stock  at  a  meet- 
ing specially  held  in  reference  thereto  on  thirty  days'  notice.  Sub- 
sequently it  was  resolved,  and  the  resolution  incorporated  in  the  plan, 
that  the  holders  of  the  common  stock  should  have  no  voting  power 
until  on  and  after  July  i,  1878,  and  that  no  assessment  should  be 
levied  upon  bondholders ;  but  that  the  cost  of  purchase  and  the  ex- 
pense of  foreclosure  and  other  proceedings  should  be  paid  out  of 
the  assets  and  the  income  of  the  company.2 

Applying  to  this  plan  the  same  tests  to  which  all  other  plans  have 
been  subjected,  it  appears  that  from  the  point  of  view  of  the  corpor- 
ation it  left  little  to  be  desired.  The  general  depression  throughout 

1  Net  earnings  "  shall  be  construed  to  mean  such  surplus  earnings  of  the  said  rail- 
road as  shall  remain,  after  paying  all  expenses  of  operating  the  said  railroad  and 
carrying  on  all  its  business,  including  all  taxes  and  assessments  and  payments  on  in- 
cumbrances,  and  including  the  interest  and  sinking  fund  on  the  first  mortgage  bonds, 
the  expenses  of  repairing  or  replacing  the  said  railroad,  its  appurtenances,  equip- 
ments, or  other  property,  so  that  the  same  shall  be  in  high  condition,  and  of  pro- 
viding such  additional  equipment  as  the  said  Company  shall  deem  necessary  for  the 
business  of  said  railroad."  Annual  Report,  1876,  p.  45. 

8  Annual  Report,  1876;  Chron.  20:  522,  1875;  Ibid.  21:  15,  1875. 


NORTHERN  PACIFIC  269 

the  country  and  the  needs  of  the  Northern  Pacific  Railroad  in 
particular  were  so  great  that  for  once,  in  the  conflict  of  interests 
between  the  bondholders  and  the  corporation,  the  latter  had  all  the 
advantage  on  its  side.  As  a  matter  of  fact,  had  any  attempt  been 
made  in  this  case,  as  so  frequently  in  others  of  recent  years,  to  unite 
in  the  exchange  of  new  securities  for  old  a  bond  and  a  stock  as  an 
equivalent  for  an  outstanding  bond,  instead  of  giving  stock  only,  the 
rate  of  interest  on  the  new  bond  would  necessarily  have  been  so  low 
as  to  deprive  the  combination  of  its  attractiveness.  That  resource 
was  not  had  to  an  income  bond  was  perhaps  due  to  the  absence  of 
English  investment  in  the  road.  The  wise  course  was  the  one  pur- 
sued :  —  namely,  to  retire  bonds  with  a  fixed  lien  on  earnings  by 
stock  which  represented  ownership  in  the  enterprise,  and  which 
could  claim  dividends  only  when  earned.  The  floating  debt  was  not 
retired  by  an  assessment  but  by  new  securities.  This  again,  all  things 
considered,  was  wise.  The  existing  stock  represented  so  little  actual 
investment  in  the  property  that  holders  would  doubtless  have  re- 
fused to  pay  an  assessment,  and  would  have  surrendered  their  cer- 
tificates instead ;  while  it  would  have  been  both  difficult  to  collect 
an  assessment  on  the  depreciated  bonds,  and  hard  to  convince  bond- 
holders of  the  justice  of  a  demand  for  such  a  contribution,  so  long 
as  the  stockholders  were  let  off  unscathed.  On  the  other  hand, 
whether  or  not  an  assessment  would  have  yielded  cash,  the  issue 
of  stock  for  floating  debt  did  not  increase  the  fixed  charges  of  the 
road,  and  was  not,  therefore,  fundamentally  unsound.  Liberal 
provision  was  made  for  future  capital  requirements,  and  the  only 
provision  to  which  exception  could  have  been  taken  was  the  limita- 
tion of  bond  issues  to  the  moderate  figure  of  $25,000  per  mile  except 
with  the  consent  of  three-quarters  of  the  preferred  stockholders. 
On  the  whole,  the  plan  put  the  company  fairly  on  its  feet,  presented 
it  with  all  the  work  which  had  been  accomplished,  and  bade  it  at- 
tempt again  the  project  in  which  its  failure  had  previously  been  so 
complete.  The  danger  of  future  bankruptcy  lay  in  this  fact  only: 
that  a  large  section  of  the  road  was  yet  uncompleted,  and  through 
business  was  non-existent;  that  the  Northwest  was  still  unsettled, 
and  the  local  business  was  small ;  in  short,  that  so  much  was  yet  to 
be  done  that  the  company,  with  all  the  advantages  which  it  now 


270  RAILROAD  REORGANIZATION 

possessed,  might  fail  again  for  the  same  reasons  which  had  led  it  into 
bankruptcy  before. 

The  plan  was  first  reported  on  May  20, 1  and  was  laid  before  the 
bondholders  on  the  3oth  of  June.  There  was  some  protest  that  it 
proposed  giving  away  the  property  of  the  bondholders,  and  the  ad- 
ditional sections  before  mentioned,  concerning  the  expenses  of  the 
reorganization  and  the  voting  power  of  the  common  stock  were 
added.  By  August  nearly  two-thirds  of  the  bondholders  had  as- 
sented.2 By  May  a  decree  of  sale  had  been  obtained,  which  was  modi- 
fied in  August  so  as  to  give  bondholders  priority  over  claims  of 
directors  for  advances  made;  and  on  August  12  all  the  property 
of  the  company,  except  the  patented  and  certified  lands,3  with  all 
its  rights,  liberties,  and  franchises,  was  sold  at  public  auction  and 
bought  in  by  a  purchasing  committee  for  $ioo,oco.4  No  upset  price 
was  set  by  the  Court ;  and  it  was  surmised  that  the  bid  was  purposely 
made  low  in  order  to  force  non-assenting  bondholders  to  accept 
the  new  stock.  The  new  corporation  was  organized  in  October, 
J875,  by  the  election  of  Mr.  Chas.  B.  Wright  of  Philadelphia  as 
president,  and  with  the  denial  of  a  petition  to  set  aside  the  sale  the 
reorganization  may  be  said  to  have  been  concluded. 

For  fourteen  years  the  company  was  now  to  be  free  from  talk  of 
further  reorganization,  and  not  until  1893  was  there  to  be  another 
receivership.  During  this  time  the  mileage,  owned  or  controlled, 
was  to  be  made  continuous  from  the  Pacific  coast  to  Chicago,  and  the 
Northern  Pacific  was  to  mount  high  among  American  railroads  in 
its  extent  and  in  the  volume  of  its  business.  In  1875  the  completed 
mileage  was,  roughly,  550  miles  of  line;  in  1893  it  was  5431.92,  and 
reached  from  Ashland,  St.  Paul,  and  Minneapolis  on  the  east  to 
Portland,  Olympia,  Tacoma,  and  Seattle  on  the  west.  In  the  former 

1  Annual  Report,  1876. 

2  R.  R.  Gaz.  7:  330,  1875.   Deposits  of  bonds  kept  coming  in,  until  on  June  30, 
1879,  when  the  rights  of  conversion  into  preferred  stock  expired,  there  remained 
outstanding  but  $529,000.    Annual  Report,  1879. 

3  These  lands  were  reserved  for  the  time  because  some  of  them  had  not  been  sur- 
veyed, and  others  which  had  been  surveyed  had  not  yet  been  deeded  to  the  company 
owing  to  a  dispute  with  the  Interior  Department  over  the  payment  of  the  costs  of 
the  surveys.   R.  R.  Gaz.  7:  340,  1875. 

4  R.  R.  Gaz.  7:  420,  1875. 


NORTHERN  PACIFIC  271 

year  the  gross  earnings  were  $414,722  and  the  net  $97,478;  in  the 
latter  the  totals  were  $23,920,109  and  $11,416,283.  At  the  same  time 
the  fixed  charges  rose  from  nothing  to  $14,311,430,  and  the  bonds 
outstanding  to  $i33,545>5°°>  besides  $15,349,000  of  bonds  of  sub- 
sidiary companies  guaranteed.  It  appears,  therefore,  that  the  pro- 
moters were  successful  in  raising  funds  for  the  completion  of  their 
enterprise,  although  their  road  suffered  at  first  from  the  thin  popula- 
tion of  the  Northwest  and  the  lack  of  a  through  connection,  and  then 
from  the  competition  of  other  transcontinental  lines. 

From  the  reorganization  to  1879  very  little  was  done  in  the  way  of 
new  construction,  owing  to  the  general  financial  depression.  Efforts 
to  get  the  time  allowed  for  completing  the  road  extended  failed,  how- 
ever, and  it  became  necessary  to  resume  in  order  to  keep  Congress 
contented  and  to  avoid  a  forfeiture  of  the  land  grant.  In  1878  a  small 
loan  was  placed,  and  the  following  year  one  for  a  somewhat  larger 
amount ;  and  with  the  funds  so  secured  construction  was  vigorously 
pushed.  More  liberal  provision  was  made  in  1880-1,  when  successful 
negotiations  were  carried  through  for  the  sale  to  a  syndicate  of 
$40,000,000  general  mortgage  6  per  cent  railroad  and  land-grant 
bonds,  to  be  issued  at  the  rate  of  $25,000  per  mile  of  finished  road 
only,  and  to  be  secured  by  a  mortgage  on  the  entire  property  of  the 
company  except  the  lands  east  of  the  Missouri  River,  which  were 
pledged  for  the  redemption  of  the  preferred  stock.  Provision  was 
made  for  a  reserve  of  these  bonds  sufficient  to  retire  the  prior  issues 
before  mentioned.1  Under  the  agreement  the  syndicate  took 
$10,000,000  at  once  and  had  an  option  of  taking  $10,000,000  per 
year  in  each  of  the  next  three  years.  The  reported  price  was  90  for 
the  first  $10,000,000  and  92  J  for  the  rest.  As  a  matter  of  fact,  the 
whole  $40,000,000  had  been  turned  over  by  the  end  of  1883,  and 
though  the  effect  on  the  company  is  seen  in  the  increase  in  its 
bonded  indebtedness  from  $3,881,884  in  1880  to  $39,522,200  in  1883, 
and  in  its  fixed  charges  from  $334,482  to  $2,478,939,  it  was  mean- 
while supplied  with  cash,  and  was  enabled  to  advance  toward  the 
completion  of  the  1000  miles  of  line  which  remained  unbuilt.  The 
financial  embarrassment  which  was  felt  in  1882,  in  spite  of  the  syndi- 
cate contract,  was  due  to  an  unforeseen  cause.  According  to  the 

1  Annual  Report,  1881. 


272  RAILROAD  REORGANIZATION 

statements  of  the  company,  it  was  felt  necessary,  in  order  to  avoid 
waste  of  time  and  money,  to  build  simultaneously  from  both  ends  of 
the  line,  and  to  start  all  the  heavy  work  on  the  entire  route  at  once. 
"This  involved  the  shipment  of  millions  of  dollars'  worth  of  track 
material,  motive  power,  and  rolling  stock  to  the  Pacific  coast  many 
months  before  their  actual  use  on  the  road ;  and  on  the  line  east  of  the 
Rocky  Mountains  very  large  expenditures  of  cash  a  long  time  before 
the  works  resulting  from  them  could  become  parts  of  finished  road."  1 
The  expenses  were  immediate ;  —  the  delivery  of  bonds  to  the  syndi- 
cate could  take  place  by  the  terms  of  the  contract  only  after  the  com- 
pletion of  finished  sections  of  road,  so  that  great  stringency  easily 
occurred  between.  The  trouble  was  only  temporary,  and  was  tided 
over  with  the  help  of  the  syndicate  and  of  the  Oregon  &  Transcon- 
tinental Company,  a  corporation  of  which  we  shall  presently  speak. 
As  the  Northern  Pacific  pushed  into  the  Northwest,  and  at  the 
same  time  vigorously  occupied  itself  in  filling  the  gap  between  the 
ends  of  its  main  line,  it  came  into  contact  with  a  combination  of 
Northwestern  companies  known  as  the  Oregon  Railway  &  Naviga- 
tion Company,  of  which  Henry  Villard  was  at  the  time  in  control. 
This  corporation  owned  a  line  of  steamboats  running  on  the  Wil- 
lamette and  Columbia  rivers  in  Oregon,  together  with  an  ocean  line 
connecting  Portland  and  San  Francisco.2  In  connection  with  the 
water  routes  a  narrow-gauge  road  had  been  built  up  the  left  bank  of 
the  Columbia  River  to  a  connection  near  the  mouth  of  the  Snake 
River  with  an  existing  narrow-gauge  road  to  the  town  of  Walla  Walla 
in  Southeastern  Washington;  and  this  narrow-gauge  was  being 
widened,  in  1880,  to  standard.  This  was  the  very  territory  through 
which  the  Northern  Pacific  expected  to  make  its  connection  with  the 
Pacific  coast ;  and  in  1880  it  had  passed  the  Rocky  Mountains  and 
had  reached  the  confluence  of  the  Columbia  and  the  Snake.  On  Oc- 
tober 20, 1880,  a  contract  was  signed  between  the  Northern  Pacific 
and  the  Oregon  Railway  &  Navigation  Companies  whereby  the  for- 
mer, among  other  things,  consented  to  a  division  of  territory  with  the 
Snake  and  the  Columbia  rivers  as  the  dividing-line ;  in  return  for  which 
the  latter  agreed  to  complete  a  standard-gauge  road  within  three  years 

1  Annual  Report,  1882,  p.  13. 

2  Henry  Villard,  Memoirs,  vol.  2,  pp.  272-94. 


NORTHERN  PACIFIC  273 

from  the  western  end  of  the  Northern  Pacific,  at  the  mouth  of  the 
Snake  River,  to  Portland,  and  to  grant  the  Northern  Pacific  the  right, 
without  the  obligation,  to  run  its  own  trains  over  it  at  a  fixed  charge 
per  train  mile.  It  will  be  remembered  that  the  Northern  Pacific  was 
not  at  this  time  too  easy  in  its  finances,  so  that  it  was  quite  willing  to 
secure  connection  with  the  coast  without  outlay  of  its  own.  Soon  after 
the  execution  of  the  contract,  however,  the  $40,000,000  loan  earlier 
described  was  arranged  for,  and  Mr.  Villard  feared  that  the  road 
would  build  its  own  connection  with  Portland  now  that  the  means 
seemed  to  be  at  hand.  To  prevent  it  he  conceived  no  less  a  plan  than 
that  of  forming  a  new  company  which  should  purchase  and  hold  a 
controlling  interest  in  both  the  Northern  Pacific  and  the  Oregon 
Railway  &  Navigation  Companies.1  This  was  done,  and  the  new 
corporation,  known  as  the  Oregon  &  Transcontinental  Company, 
for  a  long  time  played  a  prominent  part  in  Northern  Pacific  affairs ; 2 
aiding  it  in  the  construction  of  the  main  and  branch  lines,  and  time 
and  again  advancing  money  when  the  road  was  in  straits.3 

The  formation  of  the  Oregon  &  Transcontinental  Company  put 
Mr.  Villard  in  control  of  the  Northern  Pacific.  Mr.  Villard's  finan- 
cial strength  in  later  years  was  due  mainly  to  the  support  of  Ger- 
man interests,  notably  the  Deutsche  Bank  of  Berlin;  but  his  hold 
on  the  bank  and  on  his  followers  was  partly  due  to  his  real  ability 
and  resourcefulness,  and  partly  to  his  confident  predictions  of  re- 
sults which  sometimes  he  was  but  frequently  was  not  able  to  at- 
tain. One  of  the  company's  first  acts  after  his  appearance  was  the 
declaration  of  a  scrip  dividend  upon  the  preferred  stock.  The  ques- 
tion had  been  raised  in  the  course  of  his  fight  for  control,  and  he 
perhaps  felt  it  incumbent  upon  himself  to  show  the  sincerity  of  his 
contentions ;  at  any  rate,  the  annual  report  for  1882  contained  a 
statement  that  the  surplus  earnings  since  1875  nad  been  used  for 
construction  instead  of  being  distributed  as  dividends,  and  that 
the  sum  of  $4,667,490  was  therefore  properly  due  to  the  preferred 
stock.  On  the  strength  of  this  the  directors  resolved  that  a  dividend 

1  Memoirs,  p.  297. 

7  For  the  manner  in  which  the  Northern  PaciSc  directors  attempted  to  keep  Vil- 
lard from  obtaining  control,  see  notices  in  the  Chronicle  for  1881. 

3  See  First  Annual  Report  of  the  Oregon  &  Transcontinental  Company;  R.  R. 
Gaz.  14:  516,  1882  (con  tains -statement  of  organization  and  purposes). 


274  RAILROAD  REORGANIZATION 

of  1 1. 1  per  cent  be  declared,  for  which  there  were  to  be  issued  obli- 
gations of  the  company  bearing  6  per  cent  interest,  payable  at  the 
end  of  five  years,  but  redeemable  after  one  year  at  the  pleasure  of 
the  company  upon  thirty  days'  notice,  in  amounts  of  not  less  than 
20  per  cent  to  each  holder.  The  policy  thus  initiated  was  plainly 
non-conservative  and  unsound.  It  may  be  true  that  as  a  general 
principle  new  construction  should  be  paid  for  out  of  capital  rather 
than  out  of  income  account,  yet  this  is  subject  to  qualifications; 
and  the  Northern  Pacific  had  been  and  was  in  so  precarious  a 
condition  that  not  a  dollar  of  its  resources  could  safely  have  been 
alienated.  The  sequel  came  in  1883  when  the  annual  report  admitted 
that  there  had  been  an  excess  of  expenditures  on  account  of  con- 
struction and  equipment  of  $7,986,508  over  the  cash  receipts  from 
the  proceeds  of  the  $40,000,000  general  mortgage  bonds,  sales  of  pre- 
ferred stock,  and  other  sources ; 1  and  when  by  October  of  the  same 
year  the  deficit  had  been  increased  to  $9,459,921,  and  a  circular  from 
President  Villard  stated  the  additional  cash  requirements  to  amount 
to  $5,5oo,ooo.2 

Relief  had  to  be  sought  in  an  increase  of  indebtedness.  On 
October  6,  1883,  the  directors  authorized  a  second  mortgage  for 
$20,000,000  upon  the  property,  subject  to  the  consent  of  three- 
fourths  of  the  preferred  stock,  and  in  a  circular  explained  that  they 
had  accepted  a  proposition  of  Drexel,  Morgan  &  Co.,  Winslow, 
Lanier  &  Co.,  and  August  Belmont  &  Co.  to  take  $15,000,000 
of  the  issue  at  8yJ,  less  5  per  cent  commission  in  bonds,  with  a  six 
months'  option  to  take  $3,000,000  more  on  the  same  terms.  The 
stockholders  assented,  —  they  could  do  nothing  else,  —  a  suit  for 
an  injunction  was  denied,  and  the  syndicate  exercised  its  option. 
The  result  was  an  increase  in  bonds  issued  from  $39,522,200  to 
$61,635,400,  of  which  the  greater  part  was  accounted  for  by  the  new 
mortgage. 

By  August  22,  1883,  the  gap  in  the  Northern  Pacific  main  line  had 
been  filled  up,  and  on  September  8  the  formal  opening  occurred.  The 

1  Annual  Report,  1883.  Arrangements  had  been  made  with  the  Oregon  &  Trans- 
continental Company  for  necessary  advances  in  order  to  avoid  the  accumulation 
of  a  large  floating  debt. 

3  R.  R.  Gaz.  15:  716,  1883.  For  attempted  explanation  of  this  deficit,  see  Villard's 
statement  to  the  stockholders  in  1884,  just  after  his  retirement  from  the  presidency. 


NORTHERN  PACIFIC  275 

mileage  in  operation  was  then  2365,  of  which  1952.5  was  main  line 
and  412.8  branches,  and  the  rapid  construction  of  the  last  1000  miles 
had  done  credit  to  most  of  those  concerned.  The  total  capitalization 
per  mile  was  $59,304,  of  which  less  than  one-third  represented 
bonds ;  and  though  the  following  year  this  percentage  was  increased, 
the  proportion  of  mortgage  to  total  issues  remained  considerably 
under  one-half.  This  showing  was  very  favorable,  and  accounts  for 
the  success  with  which  the  Northern  Pacific  withstood  the  panic  of 
1884.  With  the  completion  of  its  through  line,  moreover,  earnings 
increased  so  materially  as  to  cover  the  interest  on  the  new  bonds ; 
and  though  the  road  was  never  to  enjoy  a  monopoly  of  transcontin- 
ental traffic,  in  February,  1883,  it  had  concluded  an  agreement  with 
the  Union  Pacific  concerning  through  rates  and  a  division  of  territory, 
and  a  period  of  prosperity  was  hoped  for.  Meanwhile  the  Oregon 
&  Transcontinental  Company  had  been  hard  hit  by  the  decline  in 
Northern  Pacific  stock,  due  to  the  publication  of  the  construction 
deficit.  The  straits  of  his  company  affected  Mr.  Villard ;  and  in  spite 
of  the  relief  afforded  by  the  Northern  Pacific  second  mortgage  he 
"became  conscious  that  neither  himself  nor  the  Oregon  &  Trans- 
continental Company  could  be  saved."  l  On  January  4,  1884,  the 
directors  accepted  his  resignation,  and  soon  after  Robert  Harris,  then 
vice-president  of  the  Erie,  was  elected  to  fill  his  place.2 

The  years  immediately  following  the  issue  of  the  second  mortgage 
and  the  completion  of  the  road  were  not  uneventful,  although  it 
is  not  necessary  to  describe  them  at  length.  The  insolvency  of 
the  Oregon  &  Transcontinental,  and  continued  disputes  between  it 
and  the  Northern  Pacific  over  an  adjustment  of  the  two  companies' 
financial  relations,  made  some  other  means  of  binding  the  Oregon 
Railway  &  Navigation  with  the  Northern  Pacific  seem  advisable, 
and  a  lease  of  the  former  company  to  the  latter  was  discussed.  In 
July,  1884,  an  arrangement  was  said  to  have  been  actually  arrived 
at  on  the  basis  of  a  guarantee  by  the  Northern  Pacific  of  6  per  cent 
on  the  Navigation  stock  for  two  years,  7  per  cent  for  three  years,  and 
8  per  cent  in  perpetuity ;  but  the  interest  was  very  high,  and  an  in- 
junction helped  to  prevent  a  consummation  at  the  time.  In  1885 

1  Memoirs,  p.  315. 

2  Villard  was  back  in  control  by  1887  with  the  backing  of  German  capital. 


« 


276  RAILROAD  REORGANIZATION 

the  idea  of  a  joint  lease  by  the  Northern  Pacific  and  Union  Pacific 
railroad  companies  came  to  the  front.  The  Oregon  Railway  & 
Navigation  was  serving  as  the  Northwestern  outlet  for  both  of  these 
roads,  and  such  a  contract  would  have  greatly  simplified  the  com- 
petitive situation,  besides  taking  away  from  the  Navigation  Company 
the  power  to  exact  an  excessive  pro-rate  because  of  its  double 
connection.1  During  the  next  few  years  negotiations  were  almost 
constantly  in  progress.  In  1887,  however,  the  Navigation  Company 
was  leased  to  the  Oregon  Short  Line  with  a  Union  Pacific  guar- 
antee; and  upon  the  failure  of  renewed  negotiations  Mr.  Villard, 
who  was  again  in  power,  sold  the  Oregon  &  Transcontinental 
Company's  holdings  of  Oregon  Railway  &  Navigation  Company 
stock  at  a  "  satisfactory "  price.  This  consummation  was  less  un- 
favorable to  the  Northern  Pacific  because  of  its  completion  of  a  line 
of  its  own  to  the  Pacific  coast.2  From  now  on  the  Oregon  &  Trans- 
continental Company  existed  only  as  a  means  of  obtaining  finan- 
cial assistance  for  the  Northern  Pacific,  and  for  making  more  easy 
the  control  of  that  company's  stock.3 

While  these  operations  were  going  on  the  Northern  Pacific  once 
more  found  it  advisable  to  increase  its  indebtedness,  and  added  a 
third  mortgage  of  $12,000,000  to  the  first  and  second  mortgages 
which  already  have  been  described.  Of  the  issue  $8,000,000  were 
at  once  taken  by  a  syndicate,  and  the  $4,000,000  remaining  were 
early  disposed  of  to  the  same  parties.  The  mortgage  was  said  to  be 
for  the  purpose  of  completing  new  work  and  for  paying  the  floating 
debt ;  it  also  assisted  in  the  redemption  and  refunding  of  the  divi- 
dend scrip  which  had  been  issued  to  preferred  stockholders  in  1883 ; 
and  the  payment  of  $3,073,321  of  this  in  cash,  besides  the  extension 
of  $1,567,500  more,  now  took  place.  The  extended  scrip  was  to 
be  payable  in  1907,  to  bear  6  per  cent,  and  to  be  redeemable  on 

1  In  1886  the  Oregon  Railway  &  Navigation  was   obtaining   28   cents  per  100 
pounds  for  its  haul  of  213  miles  from  Wallula  Junction  to  Portland,  leaving  to  the 
Northern  Pacific  28  cents  for  its  haul  of  1699  miles  from  St.  Paul  to  Wallula.  R.  R. 
Gaz.  18:  68 1,  1886,  Report  of  Vice-President  and  General  Manager  Oakes. 

2  For  the  negotiations  between  the  Union  Pacific,  the  Oregon  Railway  &  Navi- 
gation, and  the  Northern  Pacific  from  1885  to  1889,  see  the  financial  papers  of  that 
time  and  the  reports  of  the  railroads  concerned. 

8  In  1890  it  v^s  reorganized  as  the  North  American  Company. 


NORTHERN  PACIFIC  277 

thirty  days'  notice  on  any  interest  day  on  or  after  1892;  and  up  to 
January  i,  1893,  holders  had  the  option  of  converting  it  into  third 
mortgage  bonds.1  The  third  mortgage  itself  required  the  consent 
of  three-quarters  of  the  preferred  stockholders,  but  this  there  seems 
to  have  been  little  difficulty  in  securing. 

The  years  1886-9  saw  also  a  considerable  extension  of  branch  and 
other  construction.  It  was  a  time  of  great  general  activity.  In  an- 
other place  the  large  additions  to  the  Atchison  system  have  been 
described ;  at  the  same  time  the  Union  Pacific  grew  from  a  system  of 
5825.6  miles  in  1886  to  one  of  6996  in  1889,  adding  over  noo  miles ; 
the  Chicago,  Rock  Island  &  Pacific  increased  from  1384.2  to  1592.7 ; 
the  Chicago,  Burlington  &  Quincy  from  4036  to  5140.8;  and  the 
St.  Paul,  Minneapolis  &  Manitoba  from  1509.4  to  3030.1.  Mean- 
while the  Northern  Pacific  added  656.8  miles,  or  an  average  of  219 
miles  a  year.2  In  the  far  Northwest  the  great  tunnel  through  the 
Cascade  Mountains  was  nearly  completed  by  May,  1888;  and  by 
the  end  of  the  following  year  a  continuous  line  of  road  was  in  opera- 
tion from  Ashland,  Wisconsin,  to  Portland,  Oregon,  which  was  of 
particular  service  in  view  of  the  difficulties  with  the  Oregon  Rail- 
way &  Navigation  Company,  and  was  the  reason  for  the  willingness 
of  the  Northern  Pacific  to  surrender  control  of  that  connection.3 
In  1888,  also,  negotiations  were  carried  on  with  the  Canadian 
Government  for  an  extension  into  Manitoba;  and  the  same  year 
the  Cceur  d'Alene  Railroad  &  Navigation  Company  was  purchased, 
comprising  a  steamship  and  narrow-gauge  line  in  Northeastern  Wash- 
ington which  extended  through  the  mining  region  of  the  same  name.4 
Generally  speaking,  the  Northern  Pacific  retained  its  character  as 
a  single-track  transcontinental  route  with  but  few  branches.  Where 
it  did  expand  was  on  the  east,  where  it  reached  Duluth,  Ashland, 
Superior,  St,  Paul,  and  Minneapolis,  and  on  the  west,  where  it  joined 
Wallula,  Portland,  and  Tacoma.  The  principal  other  branches 

1  Annual  Report,  1888,  p.  8;  Chron.  44:  752,  1887;  Ibid.  44:  782,  1887. 

2  The  preponderance  of  west-bound  freight  prior  to  1888  forced  the  Northern 
Pacific  to  carry  grain  east-bound  at  very  low  rates  in  order  to  fill  its  empty  cars. 
See  Daniel  Buchanan  vs.  the  Northern  Pacific  Railroad  Company,  5  I.  C.  C.  Rep.  7. 

3  For  immigrant  traffic  into  the  Northwest  see  Ry.  Rev.  28:  163,  1888. 

*  The  capital  stock  of  the  Cceur  d'Alene  Company  was  $1,000,000,  and  there 
were  $360,000  in  6  per  cent  guaranteed  bonds  outstanding.  -  Ry.  Rev.  28:  551,  1888. 


278  RAILROAD  REORGANIZATION 

were  the  ones  mentioned :  namely,  those  to  Winnipeg,  and  to  the 
mining  districts  in  Montana  and  Washington. 

In  spite  of  its  moderation  the  Northern  Pacific  was  not  over- 
prosperous.  Its  passenger  earnings  remained  small,  being  scarcely 
greater  in  1888  than  they  had  been  in  1884;  and  while  its  freight 
earnings  increased  from  $7,867,367  in  1884  to  $10,426,245  in  1888, 
and  to  $15,600,320  in  1889,  this  was  so  far  offset  by  increased  oper- 
ating expenses  that  the  increase  in  net  earnings  from  both  passengers 
and  freight  was  only  $2,223,194.  Construction  meanwhile  caused  an 
increase  in  funded  indebtedness  outstanding  of  $15,202,000,  to  say 
nothing  of  $20,981,000  of  branch-line  bonds  which  the  road  by  1889 
had  guaranteed ;  and  the  floating  debt  began  to  grow  uncomfortably 
large.1  At  the  same  time,  if  Mr.  Villard  is  to  be  believed,  officials  in 
charge  of  the  operation  of  the  road  were  eager  for  appropriations  for 
the  improvement  of  the  track,  the  replacement  of  wooden  by  metal 
bridges,  additional  motive  power  and  rolling  stock,  enlargement  of 
terminal  facilities,  and  the  purchase  and  construction  of  new  lines. 
The  truth  was  that  the  problem  of  getting  the  road  built  had  been 
more  important  than  that  of  how  it  was  to  be  built ;  so  that  much 
work  had  been  done  in  a  hasty  and  imperfect  manner  which  it  was 
now  advisable  to  renew. 

Since,  then,  there  was  need  for  additional  capital,  while  it  was 
unsafe  to  increase  the  fixed  charges  of  the  road,  the  managers  felt 
called  upon  to  devise  a  scheme  whereby  these  circumstances  should 
both,  at  least  in  appearance,  be  met.  Their  solution  was  the  proposal 
of  a  large  refunding  mortgage  to  retire  as  soon  as  possible  existing 
mortgages,  and  to  provide  a  balance  which  could  be  spent  upon  the 
line.  If,  they  argued,  bondholders  could  be  induced  to  accept  new 
4  per  cent  or  even  5  per  cent  bonds  in  exchange  for  their  6  per  cent 
securities,  the  road  would  be  free  to  issue  new  additional  bonds  until 
the  margin  of  charges  so  obtained  should  have  been  taken  up.  The 
plan  was  worthy  of  its  ingenious  promoter,  Mr.  Villard,  and  will  be 
criticised  in  the  proper  place. 

1  Interest  due  and  accrued,  bills  payable  and  accounts  payable  for  the  following 
years  were: 

1884  $6,941,513  l886  $4,959^06  1888  $9,287,616 

1885  4,748,235  1887  6,504,274  1889  7,858,261 


NORTHERN  PACIFIC  279 

On  September  19,  1889,  the  managers  issued  a  circular  to  the  pre- 
ferred stockholders.  "In  the  opinion  of  the  Directors,"  said  they, 
"the  time  has  come  to  make  new  financial  provision  on  a  liberal  scale 
for  the  growing  needs  of  the  Company."  Then  followed  a  statement 
of  gross  earnings.  "A  further  corresponding  increase  may  be 
expected  in  the  present  fiscal  year,  which  will  bring  the  gross  earn- 
ings up  to  $23,000,000  or  $24,000,000.  .  .  .  But  the  Company  could 
not  in  the  past,  and  will  not  be  able  hereafter,  to  take  full  advantage 
of  this  auspicious  situation  without  further  large  investments  of 
capital.  Secondly.  —  The  prosperity  of  the  road  attracts  competi- 
tion. .  .  .  The  Company  must  be  prepared  to  build  additional 
feeders  wherever  and  whenever  the  local  developments  warrant,  and 
the  danger  of  hostile  occupancy  appears.  .  .  .  Another  strong 
[motive]  lies  in  the  Company's  ownership  of  a  large  land  grant,  the 
benefits  of  which  cannot  be  fully  realized  without  the  promotion  of 
settlements  through  the  construction  of  branch  lines.  The  Board  is 
also  of  opinion  that  the  time  has  come  to  make  such  provision,  that 
the  Company  may  take  advantage  of  its  high  credit  to  effect  a  reduc- 
tion of  fixed  charges."  1 

It  was  proposed  to  issue  a  $160,000,000  one  hundred -year  con- 
solidated mortgage,  bearing  interest  not  to  exceed  5  per  cent,  to  cover 
the  entire  Northern  Pacific  Railroad,  together  with  its  equipment, 
land  grant,  branch  lines,  and  securities  of  branch  lines.  This  was  to 
be  applied  as  follows : 

For  the  retirement  of  $77,430,000  outstanding  first,  second,  and 

third  mortgage  bonds  $75,000,000 

For  the  retirement  of  the  existing  $26,000,000  branch  bonds  26,000,000 

For  additional  branches  at  a  rate  per  mile  not  over  $30,000  20,000,000 
For  enlargement  of  terminals  and  stations,  additional  rolling  stock, 
betterments  and   renewals,  and  other  expenses  not  properly 

chargeable  to  operating  expenses  20,000,000 

For  premiums  on  bonds  exchanged  10,000,000 

For  general  purposes  9,000,000* 

Only  a  portion  of  these  securities  was,  therefore,  to  be  issued  at 
once.  The  provision  for  enlargement  of  terminals,  etc.,  was  likely 
to  call  for  early  issues,  as  might  a  portion  of  that  reserved  for 

1  Annual  Report,  1889. 

2  Annual  Report,  1889;  Chron.  50:  279,  gives  text  of  mortgage. 


280  RAILROAD  REORGANIZATION  . 

new  branches  and  for  general  purposes.  It  was  expected  that  a  cer- 
tain amount  of  branch-line  bonds  could  be  retired  without  much 
delay.  On  the  whole,  the  bonds  immediately  put  forth  were  not 
expected  to  exceed  $15,000,000 ;  though  there  was  nothing  in  the  plan 
to  prevent  a  greater  issue.  The  interest  rate  was  "not  to  exceed 
5  per  cent."  That  this  wording  was  deliberately  adopted  is  shown  by 
the  terms  of  the  mortgage,  which  expressly  gave  to  the  company  the 
power  to  issue  the  new  bonds,  from  time  to  time,  bearing  such  a  rate 
of  interest  as  the  managers  might  think  advisable  up  to  5  per  cent. 
It  was  understood  that  the  issue  was  to  be  in  three  classes,  one  of 
$57,000,000  to  bear  5  per  cent,  one  of  $23,000,000  to  bear  4^  per  cent, 
and  one  of  $80,000,000  to  bear  4  per  cent ;  and  on  this  basis  it  was 
thought  that  fixed  charges  would  be  reduced  $2,000,000,  to  which 
would  have  to  be  added  interest  on  bonds  issued  in  excess  of  those 
previously  outstanding.1  The  reserve  of  $10,000,000  for  premiums 
shows  that  in  the  opinion  of  the  directors  the  offer  of  substantially 
more  than  par  in  new  bonds  was  necessary  in  order  to  induce  ex- 
changes of  old  bonds  for  new.  To  prevent  careless  use  of  this 
reserve  it  was  provided  that  the  $10,000,000  in  bonds  could  be  used 
to  pay  premiums  only  upon  the  affirmative  vote  of  at  least  nine  mem- 
bers (out  of  thirteen)  of  the  board,  and  when  in  the  opinion  of  the 
trustees,  expressed  in  writing,  a  saving  of  interest  to  the  company 
could  be  effected. 

Not  the  least  important  part  of  the  plan  was  that  designed  to  gain 
the  preferred  stockholders'  approval.  It  will  be  remembered  that  by 
the  terms  of  the  reorganization  of  1875  the  consent  of  three-quarters 
of  these  stockholders  was  necessary  to  validate  any  mortgage  after 
the  first  mortgage  then  proposed.  The  increase  in  indebtedness  now 
suggested  threatened  to  postpone  indefinitely  dividends  on  the  pre- 
ferred, and  could  not  be  expected  to  be  welcome.  In  consequence, 
the  directors  offered  three  distinct  inducements :  first,  a  promise  of  a 
distribution  to  the  preferred  stockholders  of  sums  which  had  been 
taken  from  earnings  and  spent  on  the  property  to  date;  second,  a 
promise  of  early  and  regular  dividends  in  the  future ;  third,  a  pre- 
ferential right  of  subscription  to  the  new  bonds.  By  resolution  of 
August  21,  1889,  they  therefore  definitely  declared  in  favor  of  the 

1  Ry.  Rev.  29:  541,  1889.   In  fact  the  issues  were  all  made  at  5  per  cent. 


NORTHERN  PACIFIC  281 

distribution  of  a  sum  equal  to  the  earnings  which  should  be  found  to 
have  been  applied  in  earlier  years  to  the  capital  requirements  of  the 
property.  An  investigation  was  made,  the  amount  was  officially 
declared  to  be  $2,844,430,  and  an  equivalent  amount  of  new  bonds  at 
85  was  set  aside  to  cover  it.  For  the  future  Mr.  Villard  and  his  asso- 
ciates announced  a  determination  to  begin  dividends  at  the  rate  of 
4  per  cent,  the  first  to  be  paid  January  i,  1890;  and  declared  that 
thereafter  dividends  would  be  paid  out  of  the  current  net  earnings, 
or,  if  these  should  be  insufficient,  out  of  a  reserve  fund  until  the  net 
earnings  should  justify  a  larger  distribution.  Finally,  it  was  provided 
that  the  common  and  preferred  stockholders  should  be  given  the 
privilege  of  subscribing  to  the  new  bonds  at  85  to  the  extent  of  1 5  per 
cent  of  their  holdings.  That  these  concessions  attracted  attention 
was  shown  by  the  action  of  the  preferred  stockholders  in  calling  for  an 
actual  distribution  as  soon  as  possible  of  the  amounts  deducted  from 
earnings  in  past  years.  On  October  17,  1889,  they  passed  a  resolu- 
tion recommending  to  the  incoming  board  of  directors  uto  take  into 
consideration  the  distribution  of  the  whole  amount  due  to  the  Pre- 
ferred Stock,  under  the  plan  of  reorganization,  as  soon  as  the  Com- 
pany shall  be  financially  in  a  proper  position  to  do  so ;"  1  and  again 
the  following  year  they  resolved  "that  the  incoming  Board  of  Direct- 
ors be  ...  requested  to  set  apart  the  additional  earnings  in  ... 
consolidated  bonds  .  .  .  and  to  (consider)  the  question  of  either 
increasing  the  .  .  .  dividend  above  4  per  cent  or  of  declaring  an 
extra  dividend  to  the  preferred  stock."  2 

All  things  considered  it  is  improbable  that  the  refunding  plan 
could  have  been  put  through  without  the  promise  of  dividends  to  the 
preferred  stock,  but  it  remains  unfortunate  that  such  promises  had 
to  be  made.  The  money  which  had  been  put  into  the  road  had  been 
of  necessity  so  invested  to  preserve  the  solvency  of  the  company.  In 
a  sense  it  had  increased  earning  power,  but  not  all  expenditures 
which  affect  earnings  may  be  charged  to  capital.  In  the  first  place, 
if  earnings  are  below  fixed  charges,  or  are  constantly  tending  to  fall 

1  Annual  Report,  1890.   For  answer  of  directors  see  R.  R.  Gaz.  21 :  759,  1889. 

2  Chron.  51 :  539,  1890.  The  point  of  view  of  the  stockholders  is  briefly  but  clearly 
set  forth  in  a  circular  issued  by  Mr.  Robert  Harris,  chairman  of  the  board  of  di- 
rectors.  Ry  Age,  14:  658,  1889. 


282  RAILROAD  REORGANIZATION 

below,  sums  put  into  the  property  merely  assist  the  company  to  keep 
its  head  above  water,  and  are  not  a  sound  basis  for  an  increase  in 
indebtedness;  and  in  the  second  place  expenditures  which  serve  to 
preserve  earnings  may  not  be  charged  to  capital  account,  even  when 
the  method  of  preservation  is  the  construction  of  branch  lines,  and 
still  less  when  the  method  is  the  improvement  of  the  existing  plant. 
If,  then,  as  was  the  case,  the  earnings  claimed  by  the  preferred  stock- 
holders had  gone  to  preserve  the  solvency  of  the  company,  and  to 
defend  it  against  competition,  the  arguments  of  these  stockholders 
in  1889  did  not  hold  good. 

As  for  the  plan  itself,  it  was  simply  a  method  for  providing  new 
capital,  and  should  be  judged  as  such.  Its  refunding  provisions  were 
mainly  misleading.  It  proposed  to  secure  a  reduction  in  fixed  charges 
by  the  exchange  of  bonds  bearing  5  per  cent  or  less  for  bonds  bearing 
6  per  cent,  but  how  the  reduction  was  to  be  accomplished  was  not 
clear.  The  maturity  of  the  bonds  to  be  retired  was  remote,  and  the 
assured  reduction  was  therefore  also  remote.  The  first  mortgage  had 
been  issued  in  1881,  and  ran  for  forty  years;  the  second  dated  from 
1882  and  was  to  mature  after  fifty  years;  and  the  third,  which  had 
been  issued  only  the  year  before,  was  not  redeemable  until  1937. 
The  Missouri  division  and  Pend  d'Oreille  mortgages  matured  some- 
what earlier,1  but  had  nevertheless  a  considerable  time  to  run.  The 
mortgage  issues  would  therefore  not  soon  fall  in  of  themselves. 
Secondly,  bondholders  would  evidently  not  consent  voluntarily  to  sur- 
render old  unexpired  bonds  without  such  a  premium  in  new  bonds 
as  would  make  their  annual  return  approximately  the  same.  Some- 
thing they  might  concede  in  view  of  the  more  remote  maturity  of  the 
new  issue  and  the  somewhat  more  inclusive  character  of  its  mort- 
gage lien,  but  not  enough  to  create  any  considerable  saving.2  The 
new  issues  for  improvement  of  the  road,  moreover,  involved  an 
increase  in  the  annual  interest  payments ;  which  we  must  not,  per- 
haps, condemn  offhand,  for  the  raising  of  capital  was  in  some  meas- 
ure forced  upon  the  company,  but  which  is  important  in  considering 
the  railroad's  financial  condition  and  prospects.  The  fact  was  that 
the  Northern  Pacific  was  not  self-supporting ;  it  had  been  obliged 

1  In  1919. 

2  Evidence  of  this  appears  in  the  $10,000,000  reserved  for  premiums. 


NORTHERN  PACIFIC  283 

to  issue  $20,867,000  bonds  of  its  own  and  to  guarantee  $20,981,000 
besides,  between  1884  and  1889,  in  order  to  secure  an  advance  of 
$2,462,288  in  annual  net  income  during  a  period  of  rapidly  increasing 
prosperity ;  and  it  was  now  obliged  to  increase  this  indebtedness  in 
the  attempt  to  maintain  its  solvency  for  the  future. 

Between  1889  and  the  end  of  1892  business  increased,  and  net 
earnings  at  first  gained  more  rapidly  than  did  fixed  charges.  Mr. 
Villard  was  again  supreme  in  the  management,  and  actively  directed 
financial  operations  until  his  departure  for  Europe  in  1890.  The 
most  important  operation  conducted  was  the  lease  of  the  Wisconsin 
Central,  whereby  the  eastern  terminus  of  the  Northern  Pacific  sys- 
tem was  transferred  from  St.  Paul  and  Minneapolis  to  Chicago.  The 
directors  who  were  elected  with  Mr.  Villard  in  1887  controlled  the 
Wisconsin  Central  and  the  Terminal  Company,  which  had  been 
formed  to  secure  an  entrance  for  that  road  into  the  Lake  city.1  Per- 
haps because  of  this  financial  interest,  the  conviction  seems  to  have 
crept  over  them  that  the  Northern  Pacific  would  do  well  to  make 
connection  with  the  trunk  lines  at  Chicago,  instead  of  stopping 
further  west ;  and  they  brought  the  subject  up  in  1889,  and  again 
in  1890.  On  July  i,  1889,  a  traffic  contract  went  into  effect,  under 
which  the  Northern  Pacific  obtained  the  use  of  the  Wisconsin 
Central  lines  in  consideration  of  the  business  which  it  should  turn 
over  to  them.  Certain  provisions  imposed  on  both  roads  a  share 
of  the  operating  expenses  whenever  the  proportion  of  operating 
expenses  to  gross  earnings  was  greater  than  65  per  cent,  and  which 
gave  both  a  profit  whenever  the  proportion  fell  below  this  level.  The 
Wisconsin  Central  retained  entire  and  absolute  control  of  its  own 
property,  except  that  the  Northern  Pacific  was  to  share  in  the  profits 
of  the  subsidiary  Terminal  Company  whenever  these  profits  should 
be  more  than  $8oo,ooo.a  This  was  considered  unsatisfactory,  because 

1  Memoirs,  vol.  2,  p.  336. 

*  Annual  Report,  1889;  R.  R.  Gaz.  21:  318,  1889.  The  Wisconsin  Central  divided 
its  gross  earnings  into  two  parts,  65  per  cent  and  35  per  cent ;  retained  35  per  cent  for 
its  own  use,  and  appropriated  65  per  cent  for  operating  expenses  and  for  certain  im- 
provements tending  to  reduce  operating  expenses.  When  operating  expenses  were  less 
than  65  per  cent  the  Wisconsin  Central  was  to  pay  over  one-half  of  the  difference  to 
the  Northern  Pacific  in  consideration  of  the  business  which  the  latter  gave  it.  When 
operating  expenses  exceeded  65  per  cent  the  Wisconsin  Central  was  to  pay  not  ex- 


284  RAILROAD  REORGANIZATION 

the  Northern  Pacific  had  no  control  of  the  Central's  operation ;  and 
on  April  i  of  the  following  year  a  new  contract  gave  to  the  former  a 
lease  of  all  the  lines  owned  and  controlled  by  the  Wisconsin  Central 
Company  and  the  Wisconsin  Central  Railroad  Company  between 
St.  Paul  and  Chicago  for  999  years;  including  terminal  facilities  at 
Chicago  held  by  the  Chicago  &  Northern  Pacific  Railroad  Com- 
pany, a  subsidiary  corporation.1  "It  was  deemed  by  the  Board," 
said  the  annual  report,  "as  of  the  utmost  importance  that  your  road 
should  have  access  to  the  city  of  Chicago  by  a  line  in  its  own  owner- 
ship and  possessed  with  terminal  facilities  which  it  could  control  and 
have  possession  of.  The  whole  subject  was  most  carefully  considered 
by  the  Board,  and  the  contracts  and  leases  were  adopted  after  delib- 
erate and  careful  consideration."  2  The  advantage  of  this  lease  to 
the  Wisconsin  Central  lay  in  the  large  volume  of  traffic  which  the 
arrangement  secured  to  it ;  that  to  the  Northern  Pacific  was  more 
doubtful.  Connection  with  Chicago  was  desirable,  but  it  was  to 
prove  difficult  to  operate  the  Wisconsin  Central  for  65  per  cent,  and 
the  acquisition  was  to  arouse  the  hostility  of  all  the  other  roads 
between  Chicago  and  St.  Paul.  We  shall  see  that  the  lease  was 
presently  given  up  and  that  the  attempt  to  make  Chicago  the  eastern 
terminus  was  for  the  time  abandoned. 

The  year  1891  was  a  good  one,  but  during  the  following  twelve 
months  the  situation  changed  for  the  worse.  Most  noteworthy  was 
an  increase  in  fixed  charges  of  over  $2,000,000,  due  in  part  to  an 
increase  in  the  funded  indebtedness,  but  more  largely  to  an  increase 
in  rentals  paid.  This  increase  brought  charges  above  total  net 
income,  and  shows  how  serious  the  position  of  the  company  had 
become.  In  fact,  the  company's  repeated  issues  of  bonds  had  failed 
so  completely  to  put  it  in  a  stable  position  that  in  but  three  of  the 

ceeding  2$  per  cent  of  this  excess  out  of  its  35  per  cent,  and  to  divide  one-half  of  any 
excess  of  operating  expenses  above  67  £  per  cent  equally  between  the  Wisconsin  Cen- 
tral and  the  Northern  Pacific.  The  Northern  Pacific,  however,  was  not  bound  to 
pay  its  half  of  such  excess  except  out  of  future  profits  received  under  the  contract. 

1  Annual  Report,  1890.  For  a  brief  statement  of  the  complicated  relations  be- 
tween the  Wisconsin  Central,  the  Chicago  &  Northern  Pacific,  and  the  Chicago  & 
Great  Western,  see  R.  R.  Gaz.  22 :  350,  1890.  Terms  were  agreed  upon  with  the 
Baltimore  &  Ohio  for  the  use  of  the  Chicago  terminals  of  the  Chicago  &  Northern 
Pacific,  by  that  corporation.  Annual  Report,  1891. 

3  Annual  Report,  1890,  p.  14;  R.  R.  Gaz.  21:  318,  1889. 


NORTHERN  PACIFIC  285 

nine  years  from  1884  to  1892  was  a  surplus  greater  than  $500,000 
above  fixed  payments  secured,  while  the  operations  of  two  of  these 
same  years  resulted  in  a  deficit. 

The  first  admission  by  directors  that  the  road  was  in  difficulty 
consisted  in  the  passing  of  the  preferred  stock  dividend  for  March  31, 
1892.  That  this  action  did  not  deprive  the  holders  of  all  return  was 
due  to  the  previous  conversion  of  the  consols  formerly  reserved  into 
a  trust  for  ten  years  on  which  to  draw  whenever  the  road  should  be 
unable  to  pay  the  usual  dividends.  The  directors  therefore  added  to 
their  declaration  of  suspension  a  resolution  that  the  "time,  manner, 
and  method  of  the  distribution  of  so  many  of  the  $3,347,000  of  con- 
solidated bonds  set  aside  for  the  benefit  of  the  preferred  stockholders 
as  may  be  necessary  to  supply  the  deficiency,  if  any,  in  this  or  any 
subsequent  fiscal  year,  between  the  amount  of  net  earnings  and 
4  per  cent  on  the  preferred  stock,  be  submitted  to  preferred  stock- 
holders at  the  annual  meeting  in  October  next."  l  Not  unnaturally 
stockholders  were  alarmed.  At  the  annual  meeting  in  October  an 
investigating  committee  was  appointed,2  and  proceeded  to  a  careful 
examination  of  the  property  accompanied  by  certain  officers  of  the 
road.  The  committee  was  not  friendly  to  the  management.  Its  pre- 
liminary report  announced  that  the  physical  condition  of  the  system 
was  good,  but  its  later  criticism  of  the  company's  financial  condition 
was  severe.  In  the  words  of  the  London  Standard  "there  has  been 
no  such  scathing  arraignment  of  Directors  since  the  exposures  of  the 
Erie  Railway."  The  committee  stated  that  the  bad  condition  of  the 
property  was  due  to  the  reckless  financial  methods  of  the  directors. 

1  Chron.  54:  845,  1892.    Resolutions  adopted  at  the  stockholders'  meeting  were 
in  substance: 

"  Resolved,  That  the  $3,347,000  of  consolidated  mortgage  bonds  now  deposited 
with  the  Farmers'  Loan  &  Trust  Company  as  trustee  for  the  preferred  stockholders 
...  be  not  sold  below  90  and  accrued  interest. 

"  Resolved,  If  all  the  bonds  be  not  sold  as  above,  and  smaller  lots  can  be  disposed 
of  at  90  and  interest,  then  the  Directors  may  sell  enough  to  make  up  the  deficiency 
any  year  between  the  dividend  actually  paid  to  preferred  stockholders  and  the  4  per 
cent  which  should  be  paid. 

"  Resolved,  If  4  per  cent  dividends  or  more  are  declared  by  the  Board  of  Directors 
any  year,  then  enough  bonds  shall  be  sold  to  produce  i  per  cent  additional  dividend 
to  be  paid  to  preferred  stockholders."  Chron.  55:  679,  1892. 

2  Ry.  Rev.  32:  687,  1892.    Members  were,  Henry  Clews,  Brayton  Ives,  Frank 
Sturges,  William  Solomon,  and  Jay  Cooke,  Jr. 


286  RAILROAD  REORGANIZATION 

It  alleged  that  officers  had  held  dual  positions,  and  had  subordinated 
the  interests  of  the  Northern  Pacific  Company  to  those  of  the  Wiscon- 
sin Central,  relieving  themselves  at  the  expense  of  the  former  road. 
It  commented  upon  the  unprofitable  character  of  certain  of  the  other 
branches.  The  floating  debt,  it  maintained,  had  been  financed  by 
Mr.  Villard  personally  at  double  the  current  rates  of  interest,  and  it 
recommended  litigation  in  default  of  some  assurance  that  the  policy 
of  the  company  should  be  changed.1  In  reply  the  directors  issued  a 
lengthy  statement  taking  up  the  charges  in  detail.  The  policy  of 
building  branch  lines,  said  they,  was  imperatively  necessary  in  order 
to  develop  business.  Although  some  of  the  branches  had  not  earned 
their  fixed  charges,  yet,  if  they  had  been  credited  with  60  per  cent  of 
the  gross  earnings  on  business  which  they  had  brought  to  the  main 
line,  they  would  have  shown  a  good  profit.  The  policy  of  branch-line 
construction  had  met  with  the  unanimous  approval  of  successive 
boards  of  directors,  and  had  been  ratified  by  the  stockholders  in 
1886;  and  in  this  connection  the  reply  defended  specifically  the 
acquisition  of  the  Wisconsin  Central  and  other  lines.  The  carrying 
of  the  floating  debt  by  officials  interested  in  the  property,  instead  of 
being  subject  to  criticism  and  censure,  was  entitled  to  the  highest 
commendation.2 

It  is  difficult  to  pass  with  justice  upon  the  conflicting  contentions 
above  outlined.  However,  writing  in  1905,  long  after  his  retirement 
from  Northern  Pacific  affairs,  Mr.  Villard  expressed  himself  as  fol- 
lows: "In  1891  Mr.  Villard  .  .  .  made  .  .  .  his  last  official  tour  of 
inspection  of  the  main  line  and  principal  branches  of  the  Northern 
Pacific.  .  .  .  The  most  alarming  impression  of  all  made  upon  him 
was  the  revelation  of  the  weight  of  the  load  that  had  been  put  upon 
the  company  by  the  purchase  and  construction  of  the  longer  branch 
lines  in  Montana  and  Washington,  which  he  then  discovered  for  the 
first  time.  There  was  the  Missoula  branch  to  the  Cceurd'Alene 
mines;  the  Cceur  d'Alene  Railway  &  Navigation,  a  mixed  system 
of  steamboats  and  rail  lines ;  the  Seattle,  Lake  Shore  &  Eastern ;  and 
the  roads  built  into  Westernmost  Washington ;  representing  a  total 

1  Ry.  Times,  63:  275,  1893;  Chron.  56:  332,  1893. 

1  Ry.  Rev.  33:  143,  1893;  Chron.  56:  362,  1893;  Ry.  Times,  63:  302,  1893;  Ibid, 
p.  360.  See  also  R.  R.  Gaz.  25:  161,  1893. 


NORTHERN  PACIFIC  287 

investment  in  cash  and  bonds  of  not  far  from  $30,000,000,  which 
together  hardly  earned  operating  expenses.  The  acquisition  and 
building  of  these  disappointing  lines  had  in  a  few  years  absorbed  the 
large  amount  of  consolidated  bonds  set  aside  for  construction  pur- 
poses, which  had  been  assumed  to  be  sufficient  for  all  needs  in  that 
direction  for  a  long  time."  l  No  man  should  have  known  the  real 
profitableness  of  these  extensions  better  than  Mr.  Villard ;  and  the 
circumstances  of  his  account  give  it  special  weight.  The  admitted 
fact  that  in  several  cases  the  managers  of  the  Northern  Pacific  voted 
as  directors  of  that  corporation  to  buy  property  from  themselves  as 
whole  or  part  owners  in  other  enterprises  also  excites  distrust,  and 
this  feeling  is  strengthened  by  the  unsatisfactory  financial  condition 
in  1893  °f  tne  Northern  Pacific  system  as  a  whole. 

Even  before  the  report  of  the  investigating  committee  the  directors 
had  been  busy  with  the  floating  debt.  This  amounted  to  $9,918,000 
late  in  1892,  according  to  the  treasurer's  statement.  In  February, 
1893,  it  was  decided  to  cancel  it  by  the  sale  of  the  stock  of  the 
St.  Paul  &  Northern  Pacific  held  in  the  treasury,  but  this  aroused 
violent  opposition.  The  St.  Paul  &  Northern  Pacific  ran,  it  will  be 
remembered,  from  Brainerd  to  St.  Paul  and  Minneapolis,  and  had 
formed  the  eastern  terminus  of  the  Northern  Pacific  system  until 
the  acquisition  of  the  Wisconsin  Central.  It  was  justly  considered 
an  extremely  important  section  of  the  main  line,  and  the  possible 
loss  of  its  control  was  regarded  as  disastrous.2  Dissuaded  from  their 
first  purpose,  the  directors  considered  the  issue  of  a  collateral  mort- 
gage sufficient  in  amount  to  relieve  all  pressing  necessities,  and  pro- 
posed to  utilize  in  this  way  treasury  securities  which  it  would  have 
been  unwise  to  sell.  At  the  same  time  the  stockholders'  committee 
had  much  the  same  idea  in  mind,  and  wrote  to  President  Oakes  in 
March,  and  again  in  May.  "Referring  to  my  letter  to  you  of  March 
15,"  said  Brayton  Ives,  "I  beg  to  say  that  the  financial  plan  therein 
referred  to  contemplates  the  creation  of  a  collateral  trust  in  which 
shall  be  placed  $10,000,000  Northern  Pacific  consolidated  55, 
$3,000,000  Chicago  &  Northern  Pacific  firsts,  and  all  of  the  St. 

1  Memoirs,  pp.  359-60. 

2  Among  others  the  investigating  committee  protested  loudly  against  a  sale.    Ry. 
Rev.  33:  127,  1893. 


288  RAILROAD  REORGANIZATION 

Paul  &  Northern  Pacific  stock  belonging  to  the  Northern  Pacific 
Company,  estimated  at  $7,000,000.  Against  these  securities  it  is 
suggested  that  notes  to  the  extent  of  $12,000,000  be  issued,  bearing 
6  per  cent  interest,  and  payable  in  five  years,  or  before,  at  the  pleas- 
ure of  the  company,  provision  being  made  at  the  same  time  for 
the  increase  of  the  amount  of  the  notes  to  $15,000,000  on  the  de- 
posit of  additional  collateral  securities  satisfactory  to  the  under- 
writers. I  am  happy  to  be  able  to  repeat  the  belief  already  expressed, 
that  if  the  board  of  directors  will  allow  the  underwriters  to  name 
seven  directors  of  the  company  the  entire  amount  of  notes  will  be 
subscribed  for  without  delay."  l  This  plan  was  backed  by  respons- 
ible houses,  including  the  Mercantile  Trust  Company,  Kuhn,  Loeb 
&  Co.,  the  Equitable  Life  Assurance  Company,  and  others,  who 
agreed  to  take  $7,000,000  of  the  new  bonds  at  95,  less  i  J  per  cent 
commission.  The  directors  paid  no  attention  to  Mr.  Ives's  letter, 
and  his  offer  was  subsequently  withdrawn. 

The  directors'  own  scheme  was  dated  May  i,  1893.  It  provided 
for  a  collateral  five-year  6  per  cent  mortgage  to  the  amount  of 
$15,000,000,  of  which  $12,000,000  were  to  be  issued  at  once.  There 
was  to  be  a  committee  of  five  which  should  take  charge  of  the  issue, 
and  which  might  sell  the  collateral  before  the  maturity  of  the  notes 
at  certain  minimum  prices  or  over.  Until  all  the  notes  should  have 
been  paid  the  railroad  company  agreed  not  to  undertake  the  construc- 
tion of  any  new  lines  without  the  consent  of  the  committee,  or  to 
purchase  or  lease  any  railroad  or  navigation  lines,  or  to  guarantee, 
endorse,  or  purchase  the  bonds  or  other  obligations  or  stocks  of 
other  companies.  The  committee  was  to  have  the  voting  power 
on  the  underlying  stocks,  and  might  direct  the  trust  company  to 
waive  any  default  of  the  railroad  company  in  payment  of  interest. 
The  railroad  company  might  call  in  the  notes  before  maturity,  after 
May  i,  1896,  and  pay  them  off  at  par  and  accrued  interest.2  This, 
it  will  be  seen,  did  not  differ  in  essence  from  the  scheme  proposed 
by  Mr.  Ives :  —  the  real  contest  was  between  parties  and  not  be- 
tween plans.  In  June,  Mr.  Villard  resigned  his  position  as  director 
and  chairman  of  the  board,  and  J.  D.  Rockefeller  was  elected  a 

1  Ry.  Times,  65:  595,  1893. 

2  Chron.  56:  1017,  1893;  R.  R.  Gaz.  25:  398,  1893. 


NORTHERN  PACIFIC  289 

director.  Somewhat  earlier,  but  doubtless  in  anticipation  of  this 
action,  a  syndicate  agreed  to  underwrite  the  collateral  issue,  subject 
to  the  stockholders'  right  of  subscription;1  and  by  the  end  of  the 
year  $10,275,000  of  the  collateral  notes  were  outstanding,  of  which 
the  bulk  had  been  taken  by  the  syndicate.2  The  whole  device  was 
very  similar  to  that  employed  by  the  Union  Pacific  in  1891.  It  was 
not  designed  as  a  permanent  remedy  for  anything,  but  served  to 
postpone  a  reckoning  to  what  was  hoped  would  be  better  times.  As 
a  matter  of  fact  its  effect  was  very  small. 

Receivers  for  the  Northern  Pacific  Railroad  Company  were  ap- 
pointed August  15,  1893,  on  a  petition  alleging  that  the  company 
was  insolvent  and  had  no  funds  to  meet  payments  coming  due  on 
September  i,  October  i,  November  i,  and  December  i.  The  com- 
pany in  its  answer  admitted  the  facts,  and  the  United  States  Circuit 
Court  at  Milwaukee,  Wisconsin,  put  Messrs.  Henry  C.  Payne, 
Thomas  F.  Oakes,  and  Henry  C.  Rouse  in  charge  of  its  affairs.8 
Receivers  were  rapidly  appointed  for  most  of  the  branch  lines,  the 
intent  being  to  put  all  these  properties  in  separate  hands.4  The 
receivers  of  the  main  line  had  nothing  to  do  with  the  branches, 
although  in  November  they  were  authorized  to  enter  into  temporary 
traffic  agreements  with  them.  In  regard  to  the  Wisconsin  Central, 
application  was  early  made  to  compel  the  Northern  Pacific  to  carry 
out  the  provisions  of  the  lease ;  but  Judge  Jenkins  of  the  Milwaukee 
court  granted  the  receivers  until  September  1 5  to  decide  whether  or 
not  they  desired  to  continue,  and  upon  their  negative  reply  author- 
ized a  surrender.  The  accounts  submitted,  he  said,  showed  that 
since  the  lease  had  gone  into  effect  the  Chicago  &  Northern  Pacific 
had  been  operated  at  a  loss  to  the  Northern  Pacific  of  $1,304,169 
and  the  Wisconsin  Central  at  a  loss  of  $1,142,316;  although  business 
during  the  three  years  in  question  had  been  generally  prosperous.  In 
accordance  with  the  decision  the  property  was  turned  over  to  the 

1  The  heaviest  subscribers  were  the  Rockefellers  and  Villard  and  his  friends. 

2  Annual  Report,  1893;  Ry.  Times,  64:  290,  1893. 

8  Criticism  was  aroused  by  the  alleged  fact  that  all  three  receivers  were  adherents 
and  virtually  proteges  of  Henry  Villard.  Ry.  Times,  64:  290,  1893.  See  also  Smalley, 
p.  291. 

4  Except  that  Henry  Stanton  of  New  York  was  to  be  the  Eastern  receiver  for  all 
the  branches. 


290  RAILROAD  REORGANIZATION 

Wisconsin  Company  on  September  26,  1893,  and  the  Northern 
Pacific  for  a  time  gave  up  the  idea  of  a  Chicago  terminus.  Of  the 
other  leases  those  of  the  St.  Paul  &  Northern  Pacific  and  of  the 
Cceur  d'Alene  Railway  &  Navigation  Company  were  at  this  time 
approved  by  the  court,  and  the  receivers  were  authorized  to  make 
the  necessary  payments. 

The  failure  of  the  Northern  Pacific  was  the  signal  for  still  more 
active  and  bitter  personal  struggles  between  opposing  factions  than 
had  before  occurred.  The  opposition,  led  by  Brayton  Ives  and 
August  Belmont,  endeavored  to  get  control  of  the  company  through 
the  annual  election  on  October  19,  and  to  procure  the  removal  of 
the  appointed  receivers.  They  displayed  the  greatest  bitterness 
toward  Mr.  Villard,  and  held  him  responsible  for  the  position  in 
which  the  company  was  placed.  Villard's  "remarkable  qualities," 
wrote  Ives,  "have  been  of  advantage  only  to  himself.  .  .  .  The 
syndicate  composed  of  Villard,  Colby,  Abbott,  and  Hoyt,  and  their 
friends  made  millions  [by  the  Wisconsin  Central  deal]  and  the 
Northern  Pacific  has  suffered  and  is  suffering  a  corresponding  loss."1 
Circulars  were  sent  out  asking  proxies,  and  August  Belmont,  J. 
Horace  Harding,  Brayton  Ives,  Donald  Mackay,  and  Winthrop 
Smith  were  appointed  a  committee  to  receive  proxies  as  they  came 
in.  On  the  other  side  the  directors  appealed  to  the  stockholders, 
reminded  them  that  though  the  company  had  failed  while  they  were 
in  office  it  was  also  during  their  term  that  it  had  reached  its  greatest 
prosperity,  and  took  the  cautious  step  of  amending  the  by-laws  so 
as  to  shorten  the  term  of  future  boards  from  three  years  to  one. 
Conditions  were  against  the  management,  and  the  result  of  the  elec- 
tion was  a  complete  victory  for  the  Belmont -Ives  party,  which  was 
followed  up  by  the  choice  of  Mr.  Ives  for  president.  The  real  results 
were  less  than  might  be  supposed,  for  the  operation  of  the  railroad 
and  the  control  of  its  funds  were  to  be  in  the  hands  of  the  receivers 
and  not  in  those  of  the  officers  of  the  road.  On  January  20  President 
Ives  filed  a  petition  in  the  Milwaukee  Federal  Court  for  an  order 
directing  the  receivers  to  surrender  the  seal,  books  and  papers  and 
stock  certificates,  and  to  pay  over  sufficient  money  to  enable  the 
president  to  rent  rooms  and  pay  the  salaries  of  the  auditor,  secre- 
1  Ry.  Times,  64:  337,  1893. 


NORTHERN  PACIFIC  291 

tary,  and  treasurer.1  The  petition  was  denied,  and  the  elected  offi- 
cers were  left  in  an  anomalous  position. 

In  other  matters  the  opposition  lost  no  time  in  appealing  to 
the  courts.  Previous  even  to  the  election  two  actions  had  been  begun 
against  Henry  Villard :  the  one  in  September  by  John  Swope  of 
Philadelphia  to  compel  Henry  Villard  and  others  to  restore  stock 
and  bonds  obtained  as  a  result  of  an  illegal  conspiracy : 2  the  other 
a  petition  in  October  by  the  Northern  Pacific  Company  to  force  the 
receivers  to  bring  suit  against  Messrs.  Villard,  Hoyt,  and  Colby 
to  recover  nearly  $2,600,000  alleged  to  have  been  made  unlawfully 
through  Northern  Pacific  deals.3  The  complaints  were  hi  the  main 
the  same  as  those  which  had  been  made  by  the  investigating  com- 
mittee, and  charged,  inter  alia,  that  Villard  had  secured  a  profit 
to  himself  by  bringing  about  the  purchase  of  the  Chicago  terminal 
properties  by  the  Northern  Pacific.  Mr.  Villard  swore  that  his  whole 
interest  in  the  transaction  had  been  as  officer  and  stockholder  and 
securityholder  of  the  Northern  Pacific  Company,4  and  the  receivers 
professed  themselves  ready  and  willing  to  bring  suit,  provided  they 
were  furnished  with  the  information  and  evidence  wherewith  to 
prosecute  the  same.5  The  Court  reserved  the  Ives  motion  for  further 
consideration,  and  the  following  year  directed  the  receivers  to  bring 
suit ;  but  the  litigation  was  eventually  dropped.6 

In  December,  1893,  the  Ives  faction  filed  a  petition  for  the  re- 
moval of  the  receivers.  The  charges  were  in  part  similar  to  those 
of  the  Swope  suit.  It  was  asserted  that  at  the  time  the  receivers  were 
appointed  the  road  had  practically  had  no  hearing ;  that  its  managers 
had  in  less  than  a  year  burdened  it  with  the  interest  of  $60,000,000 
for  properties  which  were  of  no  value  to  it,  but  in  many  of  which 
they  were  personally  interested  and  out  of  which  they  made  large 
profits,  and  that  when  insolvency  was  produced  by  this  fraud  they 
had  put  the  road  in  the  hands  of  receivers  nominated  by  them  for 
the  purpose,  with  the  effect  of  perpetuating  the  same  control  which 
had  brought  the  bankruptcy.  Specific  charges  were  made  against 
Oakes,  Villard,  and  Roswell  C.  Rolston,  president  of  the  Farmers' 

1  These  officers  had  resigned  in  consequence  of  the  non-payment  of  their  salaries. 

2  Ry.  Rev.  33:  587,  1893.         •  Chron.  59:  697,  1894.         4  Ibid.  57:  765,  1893. 
5  Ry.  Age,  19:  40,  1894.  •  Ry.  Age,  23:  154,  1897. 


292  RAILROAD  REORGANIZATION 

Loan  &  Trust  Company ;  no  charges  were  made  against  Receivers 
Payne  and  Rouse,  but  their  removal  was  asked  for  because  they 
happened  to  be  in  the  company  of  and  presumably  in  the  interest 
of  Mr.  Oakes.  Besides  this,  finally,  it  was  alleged  that  separate 
receivers  had  been  unnecessarily  appointed  for  branch  lines,  and 
that  the  expense  of  administering  the  affairs  of  the  company  had 
been  enormously  increased.1  The  receivers  filed  lengthy  answers 
on  February  3 ;  Receiver  Oakes  in  particular  answering  every  charge 
specifically,  filing  exhaustive  documents  in  proof,  and  maintaining 
in  general  the  value  of  the  branch  properties  and  his  innocence  of 
unlawful  profits.2  The  court  on  the  whole  inclined  to  his  view.  On 
April  14  Judge  Jenkins  handed  down  his  decision,  dismissing  the 
petition  for  the  removal  of  Messrs.  Payne  and  Rouse,  and  holding 
Mr.  Oakes's  conduct  to  have  been  above  investigation  except  in 
three  instances,  to  examine  which  a  master  was  appointed.3  In 
the  course  of  his  decision  Judge  Jenkins  concluded  that  the  branch 
lines  in  question,  though  unprofitable  for  a  while,  were  necessary 
to  the  system ;  and  that  in  particular  the  branches  in  Washington, 
Oregon,  Montana,  and  Idaho  were  built  as  feeders,  and  owing  to 
the  sparsely  settled  district  were  necessarily  built  for  the  future. 
If  Mr.  Oakes  were  to  be  removed  on  these  charges,  said  he,  then 
it  would  make  the  entire  board  of  directors  of  the  company  at  that 
time  liable  to  impeachment.4  Mr.  Gary,  the  master,  reported  that 
Mr.  Oakes  had  had  no  pecuniary  interest  and  no  personal  advantage 
or  gain  from  any  of  the  matters  referred  to  him  for  investigation. 
Mr.  Villard  was  said  to  have  made  unlawful  gains  in  the  acquisi- 
tion of  the  Northern  Pacific  &  Manitoba  Company  to  the  extent  of 
$363,494,  but  Mr.  Oakes  did  not  know  that  Mr.  Villard  was  so 
interested,  and  was  not  bound  to  take  notice  to  prevent  such  gains.5 
In  consequence,  Judge  Jenkins  in  October  granted  a  motion  to 
dismiss  the  petition  for  the  removal  of  Oakes  as  receiver,6  and  the 
incident  was  closed. 

Ry.  Rev.  33:  783,  1893;  Chron.  57:  1123,  1893;  Ry.  Age,  19:  n,  1894. 

Ry.  Age,  19 :  89,  1894. 

Ibid.  19:  231,  1894. 

R.  R.  Gaz.  26:  294,  1894;  Chron.  58:  683,  1894. 

R.  R.  Gaz.  26:  642,  1894;  Chron.  59:  473,  1894. 

Chron.  59:  738,  1894;  Ibid.  59:  697,  1894. 


NORTHERN  PACIFIC  293 

It  thus  appears  that  Mr.  Ives  and  his  friends  obtained  but  little 
satisfaction  in  the  courts  up  to  this  point.  They  were  unable  to  force 
the  receivers  to  turn  over  any  share  of  the  Northern  Pacific's  earn- 
ings, and  they  were  equally  unable  to  remove  the  receivers  from 
office.  So  long  as  the  road  should  remain  in  the  receivers'  hands  their 
authority  seemed  destined  to  be  nominal,  and  they  were  thus  spurred 
on  by  their  own  private  interests  to  make  some  attempt  at  reorgan- 
ization. At  the  same  time  their  opponents,  as  bondholders,  were  not 
unwilling  to  receive  some  interest  on  their  bonds,  and  succeeded  in 
this,  as  in  other  matters,  in  drawing  substantial  control  into  their 
own  hands.  The  year  1894  was  a  bad  one  and  made  the  importance 
of  a  reduction  in  fixed  charges  loom  large.  Passenger  earnings 
decreased  from  $5,917,054  to  $3,960,772,  and  freight  earnings  from 
$17,017,630  to  $11,418,692;  while  in  spite  of  attempted  economies 
by  the  receivers,  net  earnings  decreased  by  almost  the  same  absolute 
amount.1  Cuts  in  wages  were  inevitable,  and  a  serious  strike  aggra- 
vated the  situation.  It  became  necessary  to  borrow  money  from  the 
Adams  Reorganization  Committee,  of  which  more  will  be  said  later, 
and  to  issue  $5,000,000  in  receivers'  certificates  to  pay  off  $5,000,000 
already  authorized  in  1893.  On  September  8  formal  announcement 
was  made  that  the  receiverships  of  the  twenty- four  branch  lines  of  the 
Northern  Pacific  system  were  to  be  terminated,  and  that  the  trustee 
was  to  undertake  the  legal  management  of  all  the  lines  for  a  stated 
sum  per  annum ;  while  the  general  receivers,  Messrs.  Oakes,  Rouse, 
and  Payne,  were  to  operate  the  separated  lines  under  a  fair  traffic 
agreement.  It  was  figured  that  $64,000  per  annum  would  be  saved ; 
and  further  economies  were  made  in  the  cost  of  the  administrative 
staff  at  New  York.  The  relief  was  insufficient.  Net  earnings  for 
1894  were  $5,506,007,  and  fixed  charges  were  $12,004,985,  and  the 
need  of  a  reorganization  was  impressively  shown. 

The  work  of  devising  a  reorganization  plan  was  done  in  the  vari- 
ous bondholders'  committees.  Late  in  1893  a  committee  of  consoli- 
dated 5  per  cent  bondholders  had  been  formed,  with  E.  D.  Adams  as 
chairman  and  General  Louis  Fitzgerald  as  vice-chairman;  which 

1  This  is  not  to  be  explained  by  more  liberal  expenditures  by  the  receivers  on 
maintenance  of  way  and  equipment,  for  the  sums  applied  to  both  these  purposes  were 
materially  less  in  1894  than  in  1893. 


294  RAILROAD  REORGANIZATION 

declared  itself  to  be  independent,  but  was  regarded  as  affiliated  with 
the  former  managers  of  the  road.  In  March,  1894,  this  committee 
announced  that,  having  received  responses  from  the  holders  of  a 
majority  of  the  consolidated  bonds,  it  had  prepared  an  agreement 
and  had  secured  its  acceptance  by  the  German  bondholders.  All 
consolidated  bondholders  were  requested  to  deposit  their  securities 
with  the  Mercantile  Trust  Company,  which  would  issue  engraved 
certificates  of  deposit,  which  the  committee  would  endeavor  to  have 
listed  on  the  Stock  Exchange.  Mr.  Ives  was  opposed  to  any  step 
toward  reorganization  of  this  sort,  and  objected  particularly  to  the 
composition  of  the  committee;  he  therefore  asked  bondholders  to 
withhold  their  acceptance  of  the  agreement,  and  gave  various  rea- 
sons to  lend  weight  to  his  request.  In  April,  as  a  counter-move,  he 
invited  bondholders  to  send  in  their  names  and  addresses  to  him, 
together  with  the  amount  of  their  holdings,  saying  that  this  action 
would  not  commit  the  bondholders,  and  was  desired  only  to  enable 
the  company  to  furnish  information  respecting  its  affairs,  and,  when 
the  proper  time  should  arise,  to  confer  about  a  reorganization  plan. 
The  rapid  falling  off  in  earnings  soon  imperilled  the  interest  of  the 
second  and  third  mortgage  bonds,  superior  to  the  consolidated 
mortgage.  In  July  the  Adams  Committee  appealed  to  the  holders  of 
these  issues,  and  secured  a  considerable  number  of  deposits.  Hence- 
forth it  planned  to  act  as  a  general  reorganization  committee.  On 
the  other  hand  a  committee  headed  by  Johnston  Livingston  com- 
peted for  deposits  of  the  second  mortgage,  and  one  headed  by  C.  B. 
Van  Nostrand  for  deposits  of  the  third  mortgage  bonds.  It  was  urged 
that  holders  of  the  earlier  issues  should  not  deposit  with  the  con- 
solidated committee,  because  its  interest  lay  in  cutting  down  prior 
liens;  whereas  the  Van  Nostrand  Committee  declared  that  the  road 
could  earn  the  interest  on  the  third  mortgage,  and  that  these  bonds 
should  not  accept  less  than  par  and  interest  in  cash.  Nevertheless 
the  Deutsche  Bank's  London  agency  announced  in  September  that 
it  was  prepared  to  receive  second  mortgage,  third  mortgage,  and  con- 
solidated bonds  on  behalf  of  the  Adams  Committee,  and  to  forward 
the  same  to  New  York  for  deposit.  Various  rumors  were  afloat  at 
this  time  concerning  reorganization,  and  suggestions  were  made  for 
converting  the  third  mortgage  bonds  into  5  per  cent  income  bonds 


NORTHERN  PACIFIC  295 

and  the  consolidated  bonds  into  preferred  stock ; l  but  the  only  result 
was  to  stir  up  protests  from  the  third  mortgage  bondholders,  who 
still  insisted  in  August  that  earnings  were  more  than  sufficient  to  pay 
the  interest  on  all  prior  liens.  Late  hi  the  year  there  was  talk  of  sell- 
ing the  road  under  foreclosure  of  the  second  mortgage,  but  this 
too  came  to  nothing. 

Meanwhile  the  operation  of  the  road  went  on.  Receiver  Rouse 
reported  on  the  condition  of  the  property  hi  January,  1894.  He 
estimated  that  $10,000,000  would  be  required  to  bring  the  perman- 
ent way  into  the  most  effective  condition  for  economical  operation. 
Exceptional  causes,  said  he,  had  contributed  to  make  the  earnings 
for  the  previous  three  years  exceptionally  large,  and  this  fact, 
together  with  the  prevailing  depression,  the  competition  of  the  Great 
Northern,  and  reduced  rates,  would  decrease  the  gross  earnings  in 
the  immediate  future  at  least  27  per  cent.  Although  Mr.  Rouse 
believed  in  the  value  of  the  Northern  Pacific's  branch  lines,  his  report 
was  not  encouraging.2  In  September,  on  the  approach  of  the  annual 
election,  President  Ives  issued  a  long  circular.  The  serious  decrease 
in  the  earnings  of  the  road,  he  said,  had  affected  for  the  worse  the 
position  of  the  stockholders,  and  these  holders  should  understand 
that  no  one  of  the  reorganization  committees  was  working  for  their 
interest.  He  announced  the  appointment  of  a  committee  to  receive 
proxies,  and  revealed  the  embarrassment  of  the  management  by  a 
request  for  contributions  of  $12.50  per  hundred  shares  in  order  to 
pay  the  expenses  of  the  officers.  So  far  as  the  officers  should  have 
any  voice  in  the  matter,  President  Ives  assured  the  stockholders, 
contributions  should  be  credited  on  any  assessments  which  might  be 
made  thereafter.  On  the  day  of  the  election  no  opposing  ticket  was 
presented,  and  the  Ives  party  were  reelected  to  their  positions.  This 
is  where  matters  stood  at  the  beginning  of  1895.  The  hostility  of  the 
opposing  committees  was  in  no  way  abated ;  but  the  Adams  Commit- 
tee had  secured  deposits  of  nearly  $21,000,000  of  the  consolidated 
mortgage  bonds,  $1,000,000  more  than  a  majority  of  the  third  mort- 
gage bonds,3  and  $3,000,000  less  than  a  majority  of  the  second 

1  Ry.  Times,  65 :  87,  1894. 

»  Ibid.  65:38,  1884. 

8  R.  R.  Gaz.  27:  160,  1895. 


296  RAILROAD  REORGANIZATION 

mortgage  bonds,  and  with  the  hearty  support  of  the  Deutsche  Bank 
was  steadily  strengthening  its  position.1 

In  May,  1895,  the  Adams  Committee  reorganization  plan  came 
out  and  marked  the  first  serious  suggestion  for  a  rehabilitation  of  the 
property.  It  proposed  a  sale,  under  foreclosure,  of  the  old  company 
and  the  formation  of  a  new  company  under  special  arrangements  for 
this  purpose.  The  new  company  was  to  issue  $100,000,000  in  shares, 
and  a  maximum  of  $200,000,000  in  gold  bonds  free  from  taxation, 
secured  by  a  mortgage  lien  on  the  whole  Northern  Pacific  system,  in- 
cluding the  St.  Paul  &  Northern  Pacific  Railway,  and  bearing  inter- 
est partly  at  4  per  cent  and  partly  at  3  per  cent,  all  under  the  same 
mortgage.  A  sufficient  amount  of  these  bonds  was  to  be  reserved  to 
replace  the  existing  first  mortgage,  besides  a  further  amount  to  ac- 
quire independent  branch  lines  or  for  new  construction  at  a  maxi- 
mum charge  of  $20,000  per  mile.  The  principal  and  interest  of  the 
new  bonds  were  to  be  guaranteed  unconditionally  by  the  Great 
Northern  Road,  in  return  for  which  the  Great  Northern  was  to  receive 
one-half  of  the  stock  of  the  new  company.  The  new  board  was  to 
consist  of  nine  directors,  of  whom  four  were  to  be  nominated  by  the 
Northern  Pacific  Reorganization  Committee.  Each  $1000  Northern 
Pacific  second  mortgage  bond  was  to  receive  a  $1125  new  Northern 
Pacific  guaranteed  bond ;  each  $1000  third  mortgage  bond  a  new 
$1000  3  per  cent  guaranteed  bond,  and  at  least  $250  in  shares ;  each 
$1000  5  per  cent  consol  at  least  $500  in  new  3  per  cent  guaranteed 
bonds  and  $300  in  shares.  Overdue  coupons  of  the  second  mortgage 
were  to  be  paid  in  cash  at  the  rate  of  5  per  cent  annually,  those  of  the 
third  mortgage  at  4  per  cent,  and  those  of  the  consols  to  be  adjusted 
at  the  rate  of  2^  per  cent  in  new  3  per  cent  bonds.  The  floating 
debt  of  the  receivership  was  to  be  paid  by  an  assessment  of  about 
$11,000,000  on  the  old  stock.  The  reorganization  and  the  raising  of 
the  necessary  working  capital  were  to  be  secured  by  a  syndicate 
headed  by  J.  P.  Morgan  &  Company  and  the  Deutsche  Bank.2 

1  For  opposing  circulars  by  the  Livingston  Committee  and  by  the  directors  see 
Ry.  Rev.  35:  55,  1895.    On  February  20,  1896,  a  Stockholders'  Protective  Com- 
mittee was  appointed,  consisting  of  August  Belmont,  Brayton  Ives,  and  George 
R.  Sheldon  of  New  York,  and  Charlemagne  Tower,  of  Philadelphia.     Chron.  62  : 
365,  1896. 

2  Chron.  60:  930,  1895.     :  « 


NORTHERN  PACIFIC  297 

Briefly  stated,  this  plan  proposed  to  decrease  somewhat  the  funded 
debt,  while  reducing  also  the  interest  rate  from  6  and  5  to  4  and  3 
per  cent.  The  reduction  in  fixed  charges  which  would  have  ensued 
it  is  impossible  to  estimate  without  further  details.  The  amount 
which  bondholders  were  asked  to  give  up  was,  however,  consider- 
able, and  for  this  compensation  was  variously  given  in  new  bonds 
and  in  new  stock.  The  floating  debt  was  not  to  be  funded,  but  was 
to  be  paid  off  by  the  commendable  method  of  an  assessment ;  and 
provision  was  made  for  working  capital,  although  at  what  cost  in 
profits  to  the  syndicate  was  not  stated.  But  more  important  than 
the  details  of  the  plan  wras  the  guarantee  of  the  new  issues  by  the 
Great  Northern  Company  for  which  it  provided.  The  question  of 
consolidation  between  the  Northern  Pacific  and  the  Great  Northern 
was  said,  on  what  purported  to  be  good  authority,  to  have  originated 
on  the  side  of  the  Northern  Pacific  among  men  to  whom  an  alliance 
seemed  necessary  to  the  prosperity  of  the  latter  road.1  Mr.  Hill  was 
said  to  have  been  at  first  reluctant,  and  to  have  consented  only  on 
condition  that  a  majority  of  the  Northern  Pacific  stock  should  be 
placed  within  his  hands.  It  can  scarcely  be  supposed,  however,  that 
he  did  not  welcome  such  a  union ;  and  the  petition  of  the  Northern 
Pacific  receivers  for  the  cancellation  of  contracts  with  the  Great 
Northern  and  the  Minneapolis  Union  railway  companies2  made 
consolidation  especially  desirable  at  this  time.  To  the  end  of  this 
consolidation  the  Adams  Committee  plan  was  chiefly  framed,  and 
on  its  execution  the  adequacy  of  the  plan  depended.  If  the  Great 
Northern  could  have  been  induced  to  guarantee  the  principal  and 
interest  of  the  new  Northern  Pacific  bonds  the  likelihood  of  a  de- 
fault would  have  been  reduced  to  a  minimum,  even  on  the  indebted- 
ness outstanding  before  the  receivership;  and  a  scheme  for  paying 
the  floating  debt  and  for  providing  a  certain  amount  of  new  capital 
would  have  been  all  that  would  have  been  required.  But  it  is  clear 
that  a  proposal  for  a  consolidation  of  two  of  the  principal  lines  serving 
the  Northwest  brought  the  consuming  and  producing  public  to  an 
interest  in  the  Northern  Pacific  reorganization  which  they  had  not 

1  R.  R.  Gaz.  27:  590,  1895. 

1  For  the  use  of  trackage  and  terminals  at  and  between  St.  Paul  and  Minneapolis. 
See  Ry.  Age,  20:  161,  1895;  Ibid.  20:  198,  1895;  R7-  Rev-  35 :  209»  l8°5- 


298  RAILROAD  REORGANIZATION 

felt  before.  So  long  as  a  reorganization  plan  dealt  merely  with  ex- 
changes and  manipulation  of  securities  by  and  among  security- 
holders,  the  influence  of  any  settlement  on  outsiders  was  very  indi- 
rect ;  but  when  it  operated  to  reduce  competition  in  a  large  section 
of  the  country  the  effect  was  plain  and  striking.  Certain  conserva- 
tive financiers  suggested  a  holding  company  to  hold  the  Great 
Northern  and  Northern  Pacific  stock,  in  order  to  throw  some  sort  of 
a  veil  over  the  proceedings,  but  Mr.  Hill  would  not  consent.1  Late 
in  August,  1895,  therefore,  a  bill  in  equity  was  filed  to  prevent  the 
proposed  cooperation,  and  on  September  17  Attorney- General 
Childs,  for  the  state  of  Minnesota,  brought  suit  for  an  injunction 
on  the  ground  that  the  combination  was  contrary  to  the  laws  of  the 
state  and  would  prevent  competition.  It  was  said  that  Mr.  Childs 
was  supported  by  the  practically  unanimous  sentiment  of  the  people 
of  Washington  and  Montana.  The  matter  came  before  the  Supreme 
Court  on  suit  by  one  Pearsall,  a  stockholder  of  the  Great  Northern, 
and  this  tribunal  held  that  the  combination  was  contrary  to  the 
laws  of  Minnesota  and  should,  therefore,  be  enjoined,  affirming  the 
principle  for  which  Mr.  Childs  contended.2  This  settled  the  fate 
of  the  Adams  reorganization  plan ;  and  an  entirely  new  scheme  had 
to  be  devised. 

But  while  once  more  progress  toward  reorganization  seemed  to 
have  ceased,  sensational  developments  occurred  in  the  factional 
conflicts  to  which  we  have  already  referred.  To  Mr.  Ives,  barred 
from  all  participation  in  the  management  of  the  road,  denied  a 
salary,  and  unable  to  obtain  the  removal  of  the  receivers  by  Judge 
Jenkins,  came  the  idea  of  appealing  to  another  court.  It  will  be  re- 
membered that  the  original  receivership  suit  had  been  instituted 
in  the  circuit  court  of  Milwaukee,  Wisconsin,  and  that  that  court 
ever  since  had  been  regarded  as  possessing  primary  jurisdiction. 
Since  no  compulsion  existed  on  other  courts  to  recognize  this  juris- 
diction of  the  Milwaukee  court,  the  orders  of  which  were  supreme 
in  its  own  district  only,  and  the  smooth  working  of  the  receivership 
was  due  to  a  respect  for  "comity,"  it  was  possible,  as  Ives  well 
knew,  for  any  circuit  court  along  the  line  to  throw  existing  arrange- 

1  Chron.  61:  325,  1895. 

3  Pearsall  vs.  Great  Northern  Railway  Company,  161  U.  S.  647. 


NORTHERN  PACIFIC  299 

ments  into  the  direst  confusion.  Relying  on  this  fact,  President  Ives 
sent  the  General  Counsel  of  the  company  to  present  applications 
for  the  removal  of  the  receivers  to  one  court  after  the  other  along 
the  road.1  In  September,  1895,  judges  willing  to  take  jurisdiction 
were  found  in  Seattle,  in  the  far  northwestern  corner  of  the  United 
States.2  Petition  was  made  in  two  parts:  first,  that  the  Seattle 
court  take  jurisdiction ;  second,  that  it  remove  Messrs.  Oakes,  Rouse, 
and  Payne.  Judge  Hanford  of  the  Federal  Court  of  the  Washington 
District  called  Judge  Gilbert  of  the  United  States  Circuit  Court  to 
sit  with  him,  and  deciding  on  the  question  of  jurisdiction  first,  ac- 
cording to  the  request  of  the  receivers,  the  two  judges  held  that  the 
principle  of  comity  did  not  of  necessity  apply  in  the  Northern  Pacific 
case  because  no  part  of  the  railroad  was  within  the  jurisdiction  of 
Judge  Jenkins's  court,  and  any  court  along  the  road  could  more 
properly  and  efficiently  administer  the  trust.  The  court,  therefore, 
directed  the  receivers  to  answer  the  charges  of  malfeasance,  and  to 
file  their  answers  in  Seattle  by  October  2 ;  also  to  file  their  accounts 
with  the  clerk  of  the  court  at  Seattle,8  and  to  file  each  a  $100,000 
bond.4 

The  result  was  the  prompt  resignation  of  the  receivers,  who  in  a 
letter  to  Judge  Jenkins  made  their  feelings  clear.  "Your  receivers 
manifestly  cannot  administer  the  trust,"  said  they,  "with  justice 
to  the  parties  interested,  or  themselves,  if  subject  to  the  orders  and 
instructions  as  to  the  general  administration  from  two  or  more 
independent  tribunals.  We  cannot  abide,  nor  can  we  ask  our  sure- 
ties to  abide,  the  danger  of  the  differences  of  opinion  between  courts, 
each  assuming  to  be  controlling  as  to  the  expenditures  of  the  re- 
ceivership in  the  general  administration,  in  view  of  the  immensity 
of  the  interests  involved.  .  .  .  Unless  your  receivers  recognize,  as 
they  understand  it,  that  that  honorable  court  [the  Seattle  court]  is  the 
court  of  primary  jurisdiction  they  will  of  necessity  be  in  contumacy. 
.  .  .  Your  receivers  are  not  willing  under  any  circumstances  to  file 
an  additional  bond  in  such  jurisdiction,  nor  are  they  willing  to  put 

1  Ry.  Rev.  35:  461,  1895. 

2  Proceedings  were  begun  in  the  Seattle  court  in  August.    See  Chron.  61 :  241, 
1895;  Ry-  ABe»  20:  394,  1895;  Ibid-  2o:  4i8,  1895;  Ibid.  20:  430,  1895. 

3  Up  to  this  time  such  accounts  had  been  filed  in  the  Milwaukee  court. 

4  Ry.  Age,  20:  442,  1895;  Ry.  Rev.  35:  503,  1895. 


300  RAILROAD  REORGANIZATION 

themselves  in  a  position  to  endanger  their  right  to  challenge  the 
jurisdiction  of  that  honorable  court."  *  Judge  Jenkins  accepted  the 
resignations  and  appointed  Messrs.  McHenry,  chief  engineer  of 
the  Northern  Pacific,  and  Bigelow,  a  Milwaukee  banker,  receivers.2 
The  hitherto  respected  principle  of  comity  had,  however,  lost  all 
force.  On  September  30  Judge  Sanborn  at  St.  Paul  confirmed 
Judge  Jenkins's  appointments  for  the  states  of  Minnesota  and  North 
Dakota ;  on  October  i  Judge  Hanford  at  Tacoma  refused  to  accept 
the  resignation  of  the  old  receivers,  but  removed  them  and  appointed 
Andrew  F.  Burleigh  for  the  district  of  Washington ;  on  October  2 
Judge  Billinger  concurred  in  Burleigh's  appointment  for  Oregon; 
on  October  7  Judge  Knowles  at  Helena,  Montana,  confirmed  the 
above  for  the  districts  of  Washington  and  Oregon,  and  appointed 
Captain  J.  H.  Mills  and  E.  L.  Bonner  for  the  district  of  Montana ; 
and  in  the  week  ending  October  26  Judge  Beatty  appointed  Bur- 
leigh receiver  for  Idaho.  The  only  conservative  action  was  that 
of  Judge  Lacombe  in  New  York,  who  deferred  his  appointments  as 
often  as  the  matter  came  before  him,  in  the  hope  that  the  Western 
judges  would  come  to  an  agreement. 

The  situation  at  the  end  of  October,  1895,  was  as  follows:  in 
Wisconsin,  Minnesota,  and  North  Dakota  there  were  two  receivers, 
Messrs.  McHenry  and  Bigelow;  in  Montana  there  were  three  re- 
ceivers, Messrs.  Mills,  Bonner,  and  Burleigh ;  and  in  Idaho,  Wash- 
ington, and  Oregon  there  was  one  receiver,  Andrew  F.  Burleigh.  It 
was  a  condition  of  affairs  which  could  not  be  endured.  In  each  of 
the  Western  States  orders  were  made  compelling  all  agents  or  per- 
sons connected  with  the  road  to  deposit  all  money  collected  in  that 
state,  and  it  was  at  any  time  in  the  power  of  the  receivers  in  any 
state  to  appoint  operating  officers  distinct  from  those  managing 
traffic  over  the  other  parts  of  the  line.  On  January  9,  1896,  Judge 
Gilbert  simplified  the  situation  by  retiring  Messrs.  Mills  and  Bonner, 
and  by  appointing  Andrew  F.  Burleigh  sole  receiver  for  the  dis- 
trict of  Montana.  This  reduced  the  number  of  receivers  to  three, 
and  left  Burleigh  in  control  of  the  road  west  of  North  Dakota,  and 
McHenry  and  Bigelow  in  control  of  the  rest.  Application  was  now 

1  Ry.  Age,  20:  478,  1895;  R.  R.  Gaz.  27:  648,  1895. 
1  Chron.  61 :  611,  1895;  R7-  Times,  68:  442,  1895. 


NORTHERN  PACIFIC  301 

made  to  the  Supreme  Court  of  the  United  States,  and  on  January 
28,  1896,  four  justices  of  this  tribunal,  acting  as  justices  assigned  to 
the  several  districts  in  which  the  Northern  Pacific  Railroad  Com- 
pany had  property,1  decided  that  Judge  Jenkins's  court  for  the  East- 
era  District  of  Wisconsin  should  be  considered  the  court  of  primary 
jurisdiction,  and  issued  each  an  order  to  this  effect  to  take  effect  in 
his  particular  circuit.2  The  various  circuit  judges  hastened  to  con- 
form. On  February  21  Judge  Lacombe  confirmed  the  appoint- 
ment of  F.  G.  Bigelow  and  E.  H.  McHenry  as  receivers  for  the 
Second  Judicial  District,  and  similar  action  had  by  then  been  taken 
by  the  judges  of  the  other  districts  except  that  of  the  state  of  Wash- 
ington. There  Judges  Gilbert  and  Hanford  refused  to  discharge 
Burleigh,  although  recognizing  that  the  general  orders  for  the  man- 
agement and  control  of  the  railroad  property  were  henceforth  to 
issue  from  Judge  Jenkins's  court.3  The  judicial  strife  was  thus  at  an 
end.  President  Ives  obtained  the  removal  of  the  receivers  to  whom 
he  particularly  objected,  but  did  not  overthrow  the  authority  of 
the  Milwaukee  court,  nor  secure  any  material  gain  to  compensate 
for  the  great  trouble  which  he  caused. 

With  the  receivership  tangle  straightened  out  it  became  possible 

1  Justices  Brown,  Harlan,  Brewer,  and  Field. 

2  "  We  are  of  the  opinion,"  said  Justices  Field,  Harlan,  and  Brewer, "  that  proceed- 
ings to  foreclose  a  mortgage  upon  lines  extending  through  more  than  one  district 
should  be  commenced  in  the  Circuit  Court  in  which  the  principal  operating  offices 
are  situated,  and  in  which  there  is  some  material  part  of  the  railroad  embraced  by 
the  mortgage.   Such  court  should  be  the  court  of  primary  jurisdiction.    But  in  view 
of  the  fact  that  a  portion  of  the  line  of  road  owned  by  the  Northern  Pacific  Company 
is  within  the  State  of  Wisconsin,  and  that  at  the  time  of  the  filing  of  the  creditors' 
bill  the  Northern  Pacific  Railroad  Company  was  operating  a  road  through  the 
Eastern  District  of  Wisconsin,  although  such  road  was  under  lease  to  it  for  99  years; 
and  in  view  of  the  further  fact  that  the  railroad  company  assented  to  the  action 
of  the  Circuit  Court  for  the  Eastern  District  of  Wisconsin  in  taking  jurisdiction, 
and  as  such  jurisdiction  has  been  recognized  by  the  Circuit  Court  in  every  district 
.  .  .  for  the  space  of  about  two  years,  we  are  of  the  opinion  that  the  Circuit  Court 
for  the  Eastern  District  of  Wisconsin  has  jurisdiction  to  proceed  to  a  decree  of  fore- 
closure which  will  bind  the  mortgagor  company  and  the  mortgaged  property,  and 
ought  to  be  recognized  by  the  Circuit  Court  of  every  district  along  the  line  as  the 
court  of  primary  jurisdiction."    Chron.  62:  234,  1896. 

3  Justice  Field  of  the  Supreme  Court  declined  to  exercise  his  authority  to  remove 
Burleigh,  intimating  that  the  existing  arrangement  was  satisfactory-    Ry.  Age,  21: 
174,  1896. 


302  RAILROAD  REORGANIZATION 

to  proceed  again  with  the  work  of  reorganization,  and  on  March  16, 
1896,  the  final  plan  was  published,  endorsed  not  only  by  the  Adams 
Committee,  but  by  President  Ives  and  his  Stockholders'  Protective 
Committee,  and  by  other  important  interests  as  well.  The  feeling 
had  become  general  that  some  action  should  speedily  be  taken, 
and  that  it  was  in  the  interest  of  all  parties  that  the  factional  conflicts 
which  had  raged  so  long  and  with  so  little  result  should  cease. 
Reorganization  was  proposed  on  the  following  basis : 

(a)  The  abandonment  of  Chicago  as  the  eastern  terminus,  and  the 
limitation  of  the  railway  on  the  east  by  the  Mississippi  River  and  the 
Great  Lakes ;  —  the  bonds  and  stocks  of  the  Chicago  &  Northern 
Pacific  and  of  the  Chicago  &  Calumet  Companies  to  be  sold. 

(b)  The  ultimate  union  of  the  main  line,  branches,  and  terminal 
properties  through  direct  ownership  by  a  single  company. 

(c)  The  reduction  of  the  fixed  annual  charges  to  less  than  the 
minimum  earnings  under  probable  conditions. 

(d)  Ample  provision  for  additional  capital  as  required  in  a  series 
of  years  for  the  development  of  the  property  and  for  the  greater 
facilities  necessitated  by  an  increased  business. 

There  were  to  be  issued : 

$130,000,000  in  prior  lien  loo-year  4  per  cent  gold  bonds,  to  be 
secured  by  a  mortgage  upon  the  main  line,  branches,  terminals,  land 
grant,  equipment,  and  other  property  embraced  in  the  reorganization 
.  .  .  and  .  .  .  thereafter  acquired.1 

$190,000,000  in  general  lien  i5o-year  3  per  cent  gold  bonds,  with  a 
lien  junior  to  the  previous  issue,  but  covering  the  same  property,  of 
which  $130,000,000  were  to  be  reserved  to  retire  the  $130,000,000 
prior  lien  bonds  when  they  should  fall  due. 

$70,000,000  in  4  per  cent  non-cumulative  preferred  stock. 

$80,000,000  in  common  stock. 

Generally  speaking,  the  new  prior  liens  were  to  go  for  old  first  and 
second  mortgage  bonds,  receivers'  certificates,  equipment  trusts,  col- 
lateral trust  notes,  St.  Paul  &  Northern  Pacific  bonds,  and  for  new 
construction ;  the  new  general  liens  for  mortgages  junior  to  the  second 
mortgage ;  the  new  preferred  stock  as  additional  inducement  to  the 

1  The  existing  general  mortgage  covered  only  the  main  line,  land  granfT  and 
equipment  so  far  as  owned  by  the  company. 


NORTHERN  PACIFIC  303 

exchanges  mentioned  above,  and  in  part  for  the  retirement  of  old 
preferred  stock ;  and  the  common  stock  for  old  preferred  stock  (in 
part)  and  common  stock.  Existing  first  mortgage  bondholders  were 
not,  however,  to  be  forced  to  give  up  their  old  securities.  "It  is  not 
sought  in  any  way  to  enforce  a  conversion  of  the  present  general  first 
mortgage  bonds,"  said  the  plan,  "  and  this  offer  is  made  solely  on  the 
belief  that  on  the  terms  proposed  such  conversion,  while  advantage- 
ous to  the  company,  is  also  manifestly  to  the  advantage  of  the  bond- 
holders so  converting."  There  were  reserved  $4,000,000  of  the  gen- 
eral liens  for  new  construction,  and  $2,500,000  new  preferred  and  an 
equal  amount  of  common  were  set  aside  under  the  general  head  "to 
provide  for  reorganization  purposes  or  available  as  a  treasury  asset." 
None  of  the  new  bonds  were  to  be  subject  to  drawing  or  to  compul- 
sory redemption  prior  to  their  regular  maturity.  The  proceeds  from 
land  sales  to  an  amount  not  exceeding  $500,000  in  any  year  were  to 
be  devoted  to  the  redemption  by  purchase  and  cancellation  of  the 
new  bonds,  purchases  to  be  made  of  prior  liens  so  long  as  these  could 
be  secured  at  not  over  1 10,  after  which  to  continue  of  the  securities 
next  in  rank.  The  preferred  stock  was  to  have  a  claim  for  4  per  cent 
before  anything  should  be  paid  on  the  common  stock,  and  was  to 
participate  equally  with  the  common  after  4  per  cent  had  been  paid 
on  each.  There  was  to  be  a  voting  trust  until  November  i,  1901, 
unless  closed  out  earlier  by  the  voting  trustees,  after  the  expiration  of 
which  the  preferred  stock  was  to  have  the  right  to  elect  a  majority  of 
the  board  of  directors  whenever  for  two  successive  years  4  per  cent 
dividends  on  their  holdings  should  not  have  been  paid.  No  addi- 
tional mortgage  was  to  be  put  upon  the  property,  and  the  amount  of 
preferred  stock  was  not  to  be  increased,  except,  in  each  instance, 
after  obtaining  the  consent  of  a  majority  of  the  whole  amount  of  the 
preferred  stock,  given  at  a  meeting  of  the  stockholders  called  for  that 
purpose,  and  the  consent  of  a  majority  of  such  common  stock  as 
should  be  represented  at  such  meeting,  the  holders  of  each  class  of 
stock  voting  separately.  During  the  existence  of  the  voting  trust  the 
consent  of  holders  of  like  amounts  of  the  respective  classes  of  bene- 
ficial certificates  was  to  be  necessary.  There  was  to  be  an  assessment 
of  $10  on  preferred  stock  and  of  $15  on  common.  Branch  lines  were 
to  be  consolidated  with  the  main  line,  but  each  case  was  to  be  dealt 


304  RAILROAD  REORGANIZATION 

with  separately,  and  a  fair  basis  of  adjustment  arrived  at,  for  which 
general  lien  3  per  cents  and  new  preferred  stock  were  reserved. 
There  was  to  be  an  underwriting  syndicate,  formed  by  J.  P.  Morgan 
&  Company,  and  the  Deutsche  Bank  of  Berlin,  to  the  subscribed 
amount  of  $45,000,000,  to  provide  amounts  of  cash  estimated  to  be 
necessary  to  carry  out  the  terms  of  the  plan,  and  to  furnish  the  new 
company  with  some  $5,000,000  working  capital  for  early  use  in  bet- 
terments and  enlargements  of  its  property.  The  syndicate's  com- 
pensation was  not  stated  in  the  plan,  but  was  to  be  "reasonable," 
and  in  addition  to  it  the  sum  of  J  per  cent  of  the  par  value  of  all 
securities  deposited  was  to  be  paid  to  J.  P.  Morgan  &  Company  and 
the  Deutsche  Bank  for  their  respective  services  as  managers  and 
depositaries.  Finally,  at  the  discretion  of  the  managers,  the  various 
properties  were  to  be  sold  under  one  of  the  several  mortgages  in 
default,  and  a  successor  company  was  to  be  organized.1 

An  examination  of  this  plan  shows  that  the  total  capitalization 
proposed,  exclusive  of  bonds  and  stock  reserved  for  new  construc- 
tion, etc.,  amounted  to  $311,000,000;  of  which  $161,000,000  were 
4  per  cent  and  3  per  cent  bonds  and  $150,000,000  stock.  The 
reported  capitalization  of  the  Northern  Pacific  Railroad  in  1893  had 
been  $218,685,631,  including  the  bonds  of  branch  roads  guaranteed ; 
but  comparison  of  this  figure  with  that  given  by  the  plan  is  not  fair, 
because  in  1893  t*16  Northern  Pacific  property  had  been  owned  by 
fifty-four  distinct  corporations,  which  the  reorganization  proposed 
to  consolidate  into  one.  A  comparison  of  the  total  bonds  and  stock 
issued  by  the  fifty-four  corporations  with  the  issue  under  the  reorgan- 
ization plan  reveals  an  increase  from  $271,949,044  to  $311,000,000, 
or  14.3  per  cent.  At  the  same  time  fixed  charges  were  to  be  decreased, 
according  to  estimates,  from  $10,509,690  to  $6,052,660;  to  cover 
which  the  managers  reported  net  earnings  of  $6,015,846  for  the  year 
ending  June  30,  1895,  and  of  $7,801,645  for  the  average  of  the  five 
years  ending  with  that  date.  It  will  be  observed,  therefore,  that  the 
plan  left  no  margin  between  net  earnings  in  1895  and  fixed  charges, 
but  relied  upon  an  increase  in  earnings  for  the  future  to  preserve  the 
solvency  of  the  road.  It  is,  however,  only  just  to  say  that  the  net 

1  See  Circular  of  the  Reorganization  Committee,  or  Chron.  62:  550,  1896;  Ry. 
Times,  69:  287-8,  1896. 


NORTHERN  PACIFIC  305 

earnings  in  1895  were  less  than  they  had  been  in  any  year  since  1887, 
with  the  exception  of  1894,  and  that  a  considerable  increase  was 
probable.  The  large  reduction  in  fixed  charges  which  was  to  take 
place  was  to  be  chiefly  at  the  expense  of  holders  of  the  consolidated 
mortgage  bonds  of  1889.  These  unfortunate  investors  received  but 
129  per  cent  in  new  securities,  of  which  nearly  one-half  was  stock,  in 
return  for  a  reduction  in  their  fixed  annual  income  from  5  to  2  per 
cent,  the  reason  being  the  inferior  character  of  their  mortgage  lien. 
That  securityholders  who  had  consented  to  exchange  their  prior 
securities  in  1889  for  the  consols  then  issued  in  the  hope  of  benefiting 
the  road  should  have  fared  considerably  worse  than  bondholders  who 
had  refused  to  make  concessions  is  an  example  of  the  injustice  some- 
times occasioned  by  successive  reorganizations  and  refundings.  Of 
the  other  securities  the  second  mortgage  received  prior  liens  and 
stock  sufficient  to  bring  its  return  over  6  per  cent,  providing  the  road 
should  earn  it,  and  the  third  mortgage  and  dividend  certificates 
received  general  liens  and  stock  sufficient  to  yield  something  over 
5  per  cent  except  in  very  prosperous  times,  when  their  income  would 
be  larger.  The  underlying  principle  in  these  cases  was  the  union  of  a 
security  with  a  fixed  claim  on  earnings  with  a  security  with  a  condi- 
tional claim  only.  The  first  mortgage  received  no  stock,  and  so  was 
denied  participation  in  future  profits,  but  in  recompense  gave  up  only 
some  .6  per  cent  in  the  annual  income  received.  The  collateral  trust 
notes  fared  nearly  as  badly  as  the  consolidated  mortgage,  but  the 
northwest  equipment  stock  was  paid  off  in  cash.  In  brief,  all  secur- 
ities but  the  equipment  stock  yielded  something,  and  the  greatest  sac- 
rifices were  demanded  from  the  junior  securities.  On  the  other  hand, 
the  stock  was  far  from  escaping  unscathed.  On  January  2,  1896, 
the  quoted  prices  were  3^  for  common  and  i2f  for  preferred.  As 
against  this  the  plan  made  assessments  of  $15  on  common  and  $10  on 
preferred ;  —  sums  which  could  obviously  be  demanded  only  because 
of  the  probable  future  appreciation  of  the  shares.  A  point  in  favor  of 
the  stock  was  the  fact  that  the  reduction  in  fixed  charges  brought  it 
nearer  a  dividend ;  although  it  must  be  remembered  that  the  common 
stock  had  to  divide  any  return  above  4  per  cent  with  the  preferred. 
The  other  salient  points  of  the  plan  were  the  provision  for  paying 
the  floating  debt,  for  supplying  fresh  capital  for  future  additions  and 


306  RAILROAD  REORGANIZATION 

improvements,  for  consolidation  of  branch  lines  with  the  main  stem, 
and  for  a  voting  trust.  The  total  floating  debt  in  1895  amounted  to 
over  $20,000,000,  of  which  $4,900,000  consisted  of  outstanding 
receivers'  certificates  and  $8,329,205  of  interest  matured  and  unpaid.1 
The  unpaid  interest  was  provided  for  in  the  exchanges  which  have 
already  been  described ;  the  receivers'  certificates  were  cancelled  by 
prior  lien  bonds,  and  the  balance  was  provided  for  by  assessment. 
This  method  was  a  sound  one.  The  provision  for  new  construction, 
betterments,  etc.,  was  liberal,  consisting  of  $25,000,000  prior  lien 
bonds,  of  which  no  more  than  $1,500,000  were  to  be  issued  in  any 
year,  and  $4,000,000  general  lien  bonds,  presumably  to  be  used  as 
needed.  One  of  the  great  difficulties  in  the  history  of  the  company 
had  been  the  lack  of  necessary  capital  for  needed  work  upon  the  line, 
and  it  was  well  that  future  requirements  were  provided  for.  The  con- 
solidation of  the  branch  lines  into  the  parent  company  was  also  wise. 
"As  it  [the  Northern  Pacific  system]  now  stands,"  the  committee 
said,  "the  system,  in  its  form  of  incorporation  and  capitalization,  is 
a  development  without  method  or  adequate  preparation  for  growth. 
Scarcely  any  single  security  is  complete  in  itself.  The  main  line  mort- 
gages cover  neither  feeders  nor  terminals.  The  terminal  mortgages 
may  be  bereft  of  their  main  line  support.  The  branch  lines  are 
dependent  on  the  main  line  for  interchange  of  business  and  the  main 
line  owes  a  large  part  of  its  business  to  the  branch  lines."2  The  plan 
contemplated  separate  bargains  with  each  branch.  Negotiations 
were  carried  on  during  1896,  and  some  of  the  arrangements  arrived 
at  were  as  follows:  The  bondholders  of  the  Northern  Pacific  & 
Manitoba  Terminal  and  of  the  James  River  Valley  Railroad  agreed 
to  take  50  per  cent  in  new  Northern  Pacific  3  per  cent  bonds  and 
50  per  cent  in  preferred  stock,  and  to  allow  the  Northern  Pacific  to 
retain  their  property.3  Bondholders  of  the  Duluth  &  Manitoba  were 
given  90  per  cent  in  cash.4  Bondholders  of  the  Spokane  &  Palouse 
received  52^  per  cent  cash,  52  J  per  cent  in  general  35,  and  25  per  cent 
in  Northern  Pacific  preferred  stock,5  and  Helena  &  Red  Mountain 

1  In  addition  there  were  $73,875  of  unpaid  interest  on  receivers'  certificates. 

2  See  R.  R.  Gaz.  28:  219,  1896,  for  editorial  on  plan. 

3  Ibid.  28:  349,  1896. 

4  Chron.  62:  1139,  1896;  Ibid.  63:  155,  1896. 
6  Chron.  62:  990,  1896;  Ibid.  62:  1041,  1896. 


NORTHERN  PACIFIC  307 

bondholders  agreed  to  accept  100  per  cent  in  new  preferred.1  A  num- 
ber of  the  branches  were  foreclosed  and  bought  in  by  the  Northern 
Pacific  reorganization  committee,  and  the  net  result  was  an  exceed- 
ingly beneficial  unification  of  the  system.  Finally,  the  voting  trust 
was  designed  to  secure  permanence  in  policy  during  the  first  years 
of  the  new  company's  existence.  The  idea  has  been  a  common,  and 
on  the  whole  a  wise  one.  In  this  case  the  membership  represented 
fairly  the  interests  which  had  been  prominent  throughout  the 
receivership,  and  consisted  of  J.  P.  Morgan,  George  Siemans,  repre- 
senting the  Deutsche  Bank,  August  Belmont,  Johnston  Livingston, 
and  Charles  Lanier.  The  trustees  were  to  fill  their  own  vacancies, 
except  that  the  successors  of  George  Siemans  were  always  to  be 
nominated  by  the  Deutsche  Bank. 

In  the  main  the  plan  was  a  good  one,  following  a  sound  principle, 
and  reducing  fixed  charges  to  a  point  which,  if  not  far  below  the 
danger-line,  proved  low  enough  in  view  of  the  subsequent  develop- 
ment in  business.  Current  opinion  was  generally  favorable,  and 
criticised  only  the  amount  of  profits  which  the  syndicate  was  to 
secure  on  the  basis  of  its  large  subscribed  capital.  Mr.  Hill  of  the 
Great  Northern  said :  "I  think  the  Northern  Pacific  reorganization 
plan  will  be  successful.  The  promoters  have  adopted  a  conserva- 
tive policy,  and  have  marked  the  interest  charges  down.  We  are 
entirely  satisfied  to  have  the  Northern  Pacific  securityholders  run 
the  road,  pay  its  debts,  and  be  charged  with  the  responsibility  of 
meeting  all  its  proper  obligations,  rather  than  to  have  it  operated 
by  the  officers  of  two  or  three  courts  which  are  continually  contending 
as  to  jurisdiction."  2  By  April  23,  when  the  time  for  deposits  ex- 
pired, the  reorganization  committee  was  able  to  announce  that  it 
held  over  92  J  per  cent  in  amount  of  general,  second,  and  third  mort- 
gage bonds,  dividend  certificates,  consolidated  mortgage  bonds, 
collateral  trust  notes,  preferred  stock,  common  stock,  northwest 
equipment  stock,  and  Northern  Pacific  and  Montana  first  mortgage 
bonds,  and  that  the  plan  and  agreement  was  therefore  declared 
operative.3  By  June  a  majority  of  the  first  mortgage  bonds  had  been 
secured,  and  it  was  announced  that  after  June  30  the  basis  of  con- 

1  Chron.  62:  1088,  1896.  '  Ry.  Times,  69:  511,  1896. 

*  Chron.  62:  779,  1896. 


308  RAILROAD  REORGANIZATION 

version  of  this  issue  would  be  reduced  from  135  to  132  per  cent  in  new 
4  per  cent  prior  lien  bonds.  On  July  24  the  Northern  Pacific  Rail- 
way filed  its  articles  of  incorporation  at  St.  Paul,  Minnesota,  and 
the  next  day  the  sale  of  the  property  took  place,  in  spite  of  suits  by 
the  general  creditors  and  the  preferred  stockholders.  The  sale  was 
in  three  parcels,  and  the  property  was  bid  in  for  $12,500,000  by 
Mr.  Winter,  the  newly  elected  president.  After  the  first  sale  the 
company's  lands  in  Wisconsin  were  offered  and  bid  in  for  $575,000, 
and  two  days  later  the  lands  west  of  the  Missouri  were  bought  in 
for  sums  aggregating  $600,000.  Finally,  on  August  4,  the  lands  in 
Washington  and  Oregon  were  bought  in  for  $1,705,200  and  $558,000 
respectively.  The  property  of  the  company  was  turned  over  by  the 
receivers  to  the  reorganization  committee  at  midnight,  August  31, 
and  on  November  7  the  final  step  in  the  reorganization  plan  was 
taken  by  the  formal  authorization  by  the  stockholders  of  the  issue 
of  $190,000,000  of  bonds.1 

From  1896  to  the  present  time  the  Northern  Pacific  has  enjoyed 
a  development  scarcely  less  noteworthy  than  that  of  the  Union  Pacific. 
Gross  earnings  have  increased  from  $23,679,718  in  1898,  the  first 
full  year  after  the  receivership,  to  $68,534,832  in  1907;  net  revenue 
from  $13,471,544  to  $33,208,840;  and  mileage  from  4350  to  5444. 
Gross  earnings  per  mile  were  $5443  in  1898;  they  were  $12,590  in 
1907.  The  retirement  of  the  eastern  terminus  of  the  system  from 
Chicago  to  St.  Paul  and  Minneapolis  was  accomplished  in  the 
course  of  1897  by  arrangement  for  connection  with  the  Chicago  & 
Northwestern  instead  of  with  the  Wisconsin  Central,  and  the  sale 
of  the  certificates  of  proprietary  interest  in  the  Chicago  Terminal 
Transfer  Railroad  received  by  the  Northern  Pacific  under  the  Chi- 
cago &  Northern  Pacific  plan  of  reorganization ;  while  the  improve- 
ment of  the  position  of  the  new  mortgages  has  been  vigorously 
prosecuted  by  the  rapid  drawing  for  redemption  of  old  first  mortgage 
bonds  at  no,  and  by  the  calling  of  the  entire  issue  of  the  Missouri 
division  bonds  at  par  and  accrued  interest. 

1  Curiously  enough  the  sale  did  not  extinguish  the  old  Northern  Pacific  Railroad 
Company.  Some  25,000  or  more  shares  did  not  assent  to  the  reorganization  plan 
and  are  still  outstanding.  They  assert  that  it  is  because  of  them  that  the  old  organ- 
ization is  kept  up. 


NORTHERN  PACIFIC  309 

In  the  years  following  1897  large  sums  have  been  spent  for  better- 
ments and  enlargements.  Some  $68,500,000  have  been  invested  from 
the  proceeds  of  the  sale  of  prior  lien  bonds  and  of  miscellaneous 
assets,  and  over  $18,000,000  have  been  temporarily  withdrawn  from 
income  for  the  same  purpose.1  Grades  have  been  reduced,  lines 
straightened,  new  branches  built,  real  estate  acquired,  track  relaid 
and  ballasted,  bridges  strengthened  and  renewed,  equipment  re- 
built and  increased  in  amount,  and  other  similar  betterments  un- 
dertaken. It  is  a  work  which  all  the  great  American  systems  have 
carried  on,  but  the  Northern  Pacific  has  surpassed  even  the  Union 
Pacific  in  the  extent  of  its  operations.  Ordinary  maintenance  re- 
quirements have  not  meanwhile  been  neglected,  and  in  1906  and 
1907  the  Northern  Pacific  set  aside  $2,000,000  for  depreciation  of 
equipment,  which  is  over  and  above  the  other  sums  which  have  been 
mentioned.  The  company  owned  1255  locomotives  on  June  30, 
1907,  of  an  average  weight  of  174,000  pounds;  in  1898  it  had  owned 
542  of  an  average  weight  of  104,000  pounds.  It  had  42,000  freight 
cars  in  1907  with  an  average  capacity  of  over  33  tons;  it  had  pos- 
sessed 18,500  in  1898  of  an  average  capacity  of  22  tons.  Seventy- 
five  per  cent  of  the  main  line  was  laid  with  track  of  72  pounds  or 
over  in  1906,  but  only  thirteen  per  cent  in  1898.  In  consequence 
heavier  trains  are  run,2  at  a  less  expense  per  ton,  and  the  net  revenue 
is  correspondingly  increased.  Even  the  liberal  expenditures  which 
have  hitherto  been  made  are  insufficient,  however,  for  present 
conditions,  and  the  stockholders  have  approved  a  proposal  to  issue 
$93,000,000  of  new  common  stock  at  par  for  the  purpose  of  extend- 
ing the  Northern  Pacific's  mileage  and  facilities.3 

The  endeavor  to  stimulate  traffic  to  fill  the  trains  has  led  to  im- 
portant developments.  In  order  to  increase  the  exchange  of  com- 
modities between  their  territory  and  the  Middle  West,  to  establish 
stable  conditions  on  transcontinental  business  and  thereby  to  secure 
back  loading  for  their  cars,  the  Great  Northern  and  Northern 

1  From  1898  to  1907  inclusive.    This  does  not  include  advances  to  subsidiary 
companies,  which  have  aggregated  nearly  $20,000,000. 

2  The  average  train  load  in  1907  was  406.77  tons;  that  in  1898  was  264.59  tons. 

3  Chron.  83:  1524,  1906;  Ibid.  84:  103,  1907.   The  new  issue  is  to  go  in  part  for 
improvements  previously  made  out  of  income.    The  directors  have  adopted  the 
questionable  policy  of  charging  all  such  expenditures  to  capital  account. 


310  RAILROAD  REORGANIZATION 

Pacific  in  1901  arranged  for  the  purchase  of  the  Burlington  system 
which  connected  both  their  lines  with  Chicago.  The  refusal  to  share 
their  purchase  with  Mr.  Harriman  led  to  the  competitive  purchase 
of  Northern  Pacific  stock  by  rival  interests,  and  to  the  retirement  of 
the  Northern  Pacific  preferred,  but  did  not  prevent  the  consumma- 
tion of  the  deal.1  This  purchase  has  been  a  profitable  one.  The 
Burlington  has  paid  in  dividends  upon  its  stock  almost  enough  to 
cover  the  interest  on  the  bonds  issued  to  acquire  it,  and  the  indirect 
effects  of  its  control  have  satisfied  expectations.  Indeed,  the  east- 
bound  lumber  traffic  has  so  developed  that  the  Great  Northern  has 
recently  raised  its  lumber  rates  in  order  once  more  to  equalize  east- 
and  west-bound  shipments. 

The  Northern  Pacific  has  been  openly  dominated  by  the  Hill- 
Morgan  interests  for  the  last  six  years,  and  probably  has  been  under 
their  control  since  its  reorganization.  From  the  financial  as  well  as 
from  the  traffic  point  of  view  its  position  is  secure.  The  voting  trust 
was  dissolved  in  1901  "by  reason,"  in  the  words  of  the  trustees,  "of 
the  evidence  of  financial  strength,  conservative  management,  skilful 
and  profitable  operation,  superior  physical  condition  of  the  property, 
and  the  reasonable  prospect  of  continued  prosperity."  2  In  1907,  out 
of  a  net  income  of  $33,208,840  only  $9,575,183  were  paid  out  for 
interest,  rentals,  and  taxes,  and  $23,473,929  were  left  for  dividends, 
improvements,  and  reserve.  This  whole  sum,  which  amounts  to 
33  per  cent  of  gross  income,  is  available  as  a  protection  for  the  mort- 
gage bonds;  and  a  considerable  portion  could  be  dispensed  with 
without  forcing  a  decrease  in  the  present  rate  of  dividends.8  It  is 
likely  that  the  coming  years  will  see  a  check  in  the  advance  of  na- 
tional prosperity,  but  the  Northern  Pacific  is  in  excellent  condition 
to  stand  the  strain. 

1  For  this  and  for  an  account  of  the  Northern  Securities  episode  see  B.  H.  Meyer, 
A  History  of  the  Northern  Securities  Case,  Bulletin  of  the  University  of  Wisconsin, 
July,  1906. 

2  Annual  Report,  1901. 

3  The  dividends  declared  by  the  Northern  Pacific  Railway  have  been: 

1898     1899     1900     1901     1902     1903     1904     1905     1906     1907 
Common  stock  2          4          4         5i          7         6i        7          7          Si* 

Preferred  stock     54441 

*  Including  August. 


CHAPTER   IX 
ROCK  ISLAND 

Charter  —  Early  prosperity  —  Reorganization  of  1880  —  Conservative  policy  —  Ex- 
tension —  Pays  dividends  throughout  the  nineties  —  Moores  obtain  control  —  Re- 
organization of  1902  —  Further  extensions  —  Impaired  credit  of  the  company. 

THE  original  Rock  Island  Railroad,  chartered  in  1847, l  was  com- 
pleted between  Chicago  and  Rock  Island  in  1854.  Construction 
was  continued  from  Rock  Island  to  Council  Bluffs  across  the  state 
of  Iowa,  under  the  charter  of  the  Mississippi  &  Missouri,  until 
1866,  when  this  company  was  merged  with  the  original  Rock  Island 
Railroad  Company,  and  after  1866  under  the  Rock  Island  charter 
until  the  extension  was  completed  in  1869.  Unlike  the  Atchison,  the 
Rock  Island  passed  through  a  fairly  well-settled  territory,  which 
was  at  the  same  time  one  of  the  most  fertile  hi  the  United  States. 
In  1870,  according  to  the  census  returns,  Iowa  produced  28,708,312 
bushels  of  spring  wheat  out  of  a  total  for  the  United  States  of  112,- 
549,733  bushels,  more  than  any  other  state  hi  the  Union;  while  Illi- 
nois in  its  yield  of  winter  wheat  was  surpassed  by  Indiana  and  Ohio 
alone.  Of  Indian  corn  Iowa  and  Illinois  together  produced  198,- 
856,460  bushels  against  562,088,089  for  all  other  states  combined. 
Manufactures  were  well  begun,  and  even  mining  had  attained  a 
considerable  development,  particularly  in  the  extraction  of  bitumin- 
ous coal  in  Illinois.  Naturally  the  road  was  prosperous;  gross 
earnings  increased  from  $3,154,236  in  1866  to  $5,995,226  in  1870, 
and  to  $9,409,833  in  1879;  while  net  earnings  attained  the  very 
considerable  sum  of  $4,548,117  in  1879,  being  48  per  cent  of  the 
gross  receipts.  At  the  same  time  the  capitalization  was  very  moderate, 
due  to  the  relatively  level  character  of  the  country  through  which 
the  road  ran,  and,  not  less  important,  to  the  absence  of  speculative 
financial  operations  in  the  course  of  its  construction.  To  build  1231 
miles  had  cost  in  1879  but  $35,664,200,  of  which  $4,702,202  had 
been  supplied  from  earnings ;  leaving  a  total  of  bonds  and  stocks  of 

1  Poor's  Manual,  1878.  The  name  was  first  the  Rock  Island  &  La  Salle  Railroad 
Company,  and  was  changed  to  the  Chicago  &  Rock  Island  Railroad  Company  in 
February,  1851. 


312  RAILROAD  REORGANIZATION 

$30,962,000,  or  $25,151  per  mile.  Fixed  charges  were,  therefore, 
low.  In  1875,  when  net  earnings  were  $3,853,676,  interest  on  bonds, 
taxes,  and  all  other  necessary  disbursements  took  but  $1,065,395 ; 
and  in  1879  the  payments  were  markedly  less.  Is  it  strange  that 
the  troubles  of  the  road  came  from  too  great  earnings  rather  than 
from  too  small,  and  that  instead  of  striving  to  maintain  solvency 
the  directors  had  to  seek  ways  and  means  for  concealing  or  getting 
rid  of  earnings  without  arousing  the  hostility  of  legislators  to  whom 
10  per  cent  dividends  seemed  high,  and  anything  over  10  per  cent 
proof  of  extortion?  Between  1866  and  1876  four  cash  distributions 
of  10  per  cent  were  made  to  stockholders,  five  of  8  per  cent,  one  of 
8J  per  cent,  and  one  of  7i  per  cent.  The  dividend  for  1879  was  again 
10  per  cent,  that  of  1878  8  per  cent,  and  that  for  1879  9^  per  cent. 
Meanwhile  large  sums  were  carried  to  surplus.  The  balance,  after 
all  disbursements,  never  after  1873  fell  below  $665,000,  and  in  1879 
was  nearly  equal  to  the  dividend  declared ;  that  is,  while  distribut- 
ing $1,993,086,  or  9.5  per  cent,  the  road  earned,  over  and  above 
charges,  $3,947,065,  or  18.8  per  cent. 

It  was  inevitable  that  some  attempt  should  be  made  to  increase 
the  distribution  to  stockholders ;  and  the  most  obvious  method  was 
the  one  adopted,  viz.,  a  watering  of  the  stock.  The  plan  devised  in 
1880  was  as  follows :  It  was  proposed  to  consolidate  various  branches 
of  the  railroad  company,  hitherto  operated  as  separate  corporations, 
with  the  main  line ;  and  to  do  this  through  the  formation  of  a  new 
company,  which  should  exchange  its  stock  for  the  stock  of  the  pre- 
viously existing  corporations  in  the  ratio  of  two  to  one.  Practically 
all  the  stock  retired  was  owned  by  the  Chicago,  Rock  Island  & 
Pacific  Railroad  Company,  so  that  the  only  increase  in  stock  out- 
standing came  through  the  distribution  to  the  stockholders  of  the 
parent  company.  In  March  the  executive  committee  of  the  Rock 
Island  passed  the  following  resolution :  "Resolved,  that  the  proposi- 
tion to  consolidate  the  capital  stock,  property,  rights,  franchises,  and 
privileges  of  the  Chicago,  Rock  Island  &  Pacific  Railroad  Company 
with  the  capital  stock,  property,  rights,  franchises,  and  privileges 
of  the  Iowa  Southern  &  Missouri  Northern  Railroad  Company,  the 
Newton  &  Monroe  Railroad  Company,  the  Avoca,  Macedonia  & 
Southwestern  Railroad  Company,  and  the  Atlantic  &  Audubon 


ROCK  ISLAND  313 

Railroad  Company  into  a  consolidated  Railroad  Company,  with  an 
authorized  capital  of  $50,000,000,  and  such  powers  as  shall  be 
assumed  in  the  articles  of  consolidation,  be  submitted  to  a  vote  of  the 
stockholders  of  this  company  at  their  annual  meeting." l  Of  the  roads 
named  only  the  Iowa  Southern  &  Missouri  Northern  was  of  import- 
ance, extending  270  miles  from  Washington,  Iowa,  to  Leaven  worth, 
with  branches  which  raised  its  total  to  347  miles.  This  company  had 
been  organized  as  the  Chicago  &  Southwestern  Railroad  Company, 
and  the  main  line  had  been  completed  in  1871.  The  Chicago,  Rock 
Island  &  Pacific  Railroad  Company  had  guaranteed  its  $5,000,000 
main-line  bonds,  with  a  provision  that  it  could  demand  foreclosure  if 
called  upon  to  pay  either  interest  or  principal,  and  in  return  had 
secured  a  lease  in  perpetuity.  The  road  had  been  sold  under  fore- 
closure and  reorganized  in  1875  as  trie  I°wa  Southern  &  Missouri 
Northern,  and  had  issued  its  stock  to  the  Rock  Island  in  return  for 
money  advanced  by  that  company,  the  stock  to  be  held  in  trust  to 
1926,  and  then  to  become  the  property  of  the  lessee.  The  other  roads 
did  not  together  possess  more  than  80  miles  of  line,  so  that  the  oper- 
ation was  a  genuine  case  of  stock-watering.  The  opinion  of  the  stock- 
holders may  be  inferred  from  the  quotations  of  their  shares.  Between 
January  2  and  June  i,  1880,  the  quotations  of  Rock  Island  common 
rose  from  149  to  189,  with  few  sales,  in  anticipation  of  the  distribu- 
tion. On  June  2  the  stockholders  formally  gave  their  approval,  and 
on  June  4  the  Chicago,  Rock  Island  &  Pacific  Railway  started  on  its 
career.2  The  price  of  the  new  stock  was  of  course  less  than  that  of  the 
old.  It  started  at  io6J,  but  by  December  it  had  reached  122},  and 
by  June  the  following  year  had  risen  to  over  141. 

This  may  be  called  Rock  Island's  first  reorganization.  It  doubled 
the  stock  of  the  road,  and  increased  its  indebtedness  by  the  assump- 
tion of  the  $5,000,000  bonds  of  the  Iowa  Southern  &  Missouri 
Northern ;  but  the  new  stock  involved  no  increase  in  fixed  charges, 
and  the  new  bonds  a  nominal  increase  only.  Instead  of  being  occa- 
sioned by  too  little  prosperity  it  was  caused  by  too  much;  and 
instead  of  being  carried  through  after  active  opposition  from  many 
of  the  interests  concerned,  and  reluctant  acquiescence  from  the  others, 

1  Chron.  30:  356,  1880. 

2  Chron.  30:  616,  1880. 


314  RAILROAD  REORGANIZATION 

it  occasioned  a  rise  in  price  of  the  common  stock  of  27  per  cent  in  six 
months. 

Between  this  date  and  1902  no  reorganization  occurred.  A  rapid 
review  of  the  period  brings  out,  however,  certain  interesting  features : 
First,  that  the  stockholders  and  the  directors  were  extremely  con- 
servative ;  second,  that  this  conservatism  did  not  keep  the  road  from 
sharing  in  the  expansion  of  mileage  from  1887-9,  which  was  so 
general  in  the  Middle  West ;  third,  that  this  expansion  decreased  the 
average  receipts  per  mile,  and  consequently  the  rate  of  dividends, 
and  occasioned  a  fall  in  stock  quotations  from  140!  to  63! ;  fourth, 
that  though  weakened  the  road  went  through  the  panic  of  1893  and 
the  subsequent  depression  without  suspending  dividends ;  and  fifth, 
that  the  year  1901  saw  the  beginning  of  a  new  expansion  of  the 
system,  accompanied  by  a  change  in  control  and  the  carrying  out 
of  more  ambitious  plans  than  had  ever  occurred  to  the  men  of  the 
previous  generation. 

The  conservatism  of  the  stockholders  is  shown  in  the  election,  year 
after  year,  of  the  same  men  to  positions  of  authority.  Rock  Island 
was  not  a  speculative  road;  the  high  price  of  its  stock  forbade. 
Stockholders  regarded  their  shares  as  permanent  investments,  and, 
satisfied  with  the  returns  secured,  loyally  supported  the  management 
in  good  times  and  in  bad.  Between  1875  and  1897  there  were  but  two 
presidents,  Mr.  Riddle  holding  the  position  until  1883,  and  then 
giving  way  to  Mr.  R.  R.  Cable,  who,  after  directing  the  policy  of  the 
company  for  fourteen  years,  served  as  chairman  of  the  board  of 
directors  from  1898  to  1901.  Among  the  five  members  of  the  execu- 
tive committee,  if  the  reckoning  is  begun  with  the  year  1881,  three 
had  been  in  office  five  years  by  1886,  one  2  years,  and  one  i  year, 
or  an  average  of  3§  years.  In  1891  two  members  had  been  in  10 
years,  one  7  years,  one  6  years,  and  one  i  year,  or  an  average  of 
6£  years ;  and  in  1901  one  member  had  been  in  2Oj^?ars,  one  1 7  years, 
one  8  years,  one  3  years,  and  one  2  years,  or  an  Average  of  10  years. 
The  board  of  directors  showed  the  same  general  tltfidency.  In  1890 
seven  of  the  thirteen  directors  had  served  for  9  years,  and  the  aver- 
age service  was  6^  years ;  in  1897  four  of  the  directors  had  served  for 
1 6  years,  and  the  average  was  g\% .l  It  was  but  natural  that  men 

1  For  the  attempt  of  Vanderbilt  to  get  representation  on  the  board  see  the  pamphlet 


ROCK  ISLAND  315 

working  under  these  conditions  should  have  been  apt  to  err  on  the 
side  of  caution  rather  than  on  the  side  of  recklessness ;  and  we  find 
them,  therefore,  slow  to  extend  their  system,  and  slow  to  stretch  into 
new  territory  where  traffic  returns  were  uncertain,  and  where  the 
road  had  to  create  its  business  as  it  went.  At  the  date  of  the  consoli- 
dation the  company  had  become  the  owner  of  1038  miles  and  oper- 
ated under  lease  273  miles  more,  or  a  total  of  1311  miles.  By  1883 
this  had  been  increased  to  1381 ;  but  in  1887  the  total  was  only 
1384.2,  showing  a  total  construction  of  little  over  three  miles  in  four 
years. 

This  policy  had  to  be  abandoned,  for  other  roads  were  extending 
their  lines  in  Iowa  and  Illinois,  and  the  Rock  Island's  share  of 
Western  business  tended  to  fall  off  with  the  construction  of  rival  lines 
west  of  the  Missouri.  As  the  report  of  1889  expressed  it,  "while  the 
lines  of  this  company  terminated  at  the  Missouri  its  competitors  for 
business  had  extended  beyond,  reaching  in  many  cases  the  extreme 
western  boundaries  of  population  and  even  further.  Thus  the  volume 
of  traffic  received  by  the  company  for  carriage  to  and  from  the  West 
was  materially  affected,  while  in  order  to  restore  the  equilibrium 
overbalanced  by  the  reduction  in  rates,  the  reverse  was  necessary,  a 
larger  rather  than  a  smaller  share  of  the  tonnage  to  and  from  points 
west  of  the  Missouri  was  demanded  by  the  situation."  The  directors 
were  forced  against  their  will  to  take  active  measures  in  self -protec- 
tion. As  early  as  1884  a  bond  issue  was  approved  for  construction 
from  Minneapolis  westward  to  an  eventual  junction  with  the 
Northern  Pacific.2  Building  was  to  be  carried  on  in  the  name  of  the 
Wisconsin,  Minnesota  &  Pacific  Railroad  Company,  and  the  secur- 
ities of  this  company  were  to  be  received  by  the  Rock  Island  as  col- 
lateral for  the  issue  which  it  made.8  Two  years  later  more  extensive 
plans  were  put  on  foot,  and  the  Chicago,  Kansas  &  Nebraska  Rail- 
road Company  was  organized  to  carry  out  construction  west  of  the 
Missouri.  The  new  company  had  a  capital  stock  of  $15,000,000,  and 
then  (1887)  of  $30,000,000,  and  an  indebtedness  in  1889  of  $25,141,- 

issued  by  the  Rock  Island  Company  at  this  time;  also  R.  R.  Gaz.  16:  420,  1884; 
Annual  Report,  1884;  Ry.  Age,  9:  428,  1884. 

2  R.  R.  Gaz.  16:  891,  1884. 

3  R.  R.  Gaz.  16:  709,  1884. 


316  RAILROAD  REORGANIZATION 

ooo  6  per  cent  first  mortgage  bonds ;  and  turned  over  all  of  its  bonds, 
and  practically  all  of  its  stock  to  the  Chicago,  Rock  Island  &  Pacific 
Railway  in  consideration  of  advances  made  to  it.  The  Rock  Island 
Company  in  its  turn  reserved  the  branch-line  bonds  as  collateral,  and 
issued  against  them  its  own  5  per  cent  collateral  and  extension 
bonds;  agreeing  to  supply  all  money  needed  for  construction  and 
equipment,1  and  leasing  the  new  railway  at  a  rental  of  30  per  cent  of 
its  gross  earnings.2  Under  this  arrangement  1388  miles  were  built  by 
1889  and  276  leased,  making  a  total  of  1664.4.  In  1889  it  was 
thought  more  convenient  to  consolidate  the  two  systems,  so  interest 
was  defaulted  on  the  Chicago,  Kansas  &  Nebraska  bonds,  and  fore- 
closure proceedings  commenced ;  resulting  in  1891,  in  spite  of  protests 
by  municipalities  along  the  route,  in  a  foreclosure  sale  and  union 
of  the  two  properties  in  name  as  well  as  in  fact.  The  collateral 
bonds  of  the  Chicago,  Rock  Island  &  Pacific  now  became  a  direct 
instead  of  an  indirect  lien  upon  the  Kansas  &  Nebraska  mileage.3 

Owing  to  these  operations  the  mileage  of  the  system  increased 
from  1384  in  1887  to  3257  in  1889,  and  to  3408  in  1891.  The  greater 
part  now  lay  in  Kansas,  Nebraska,  and  Colorado  instead  of  in  Illinois 
and  Iowa,  while  at  the  same  time  the  addition  of  the  new  mileage 
through  sparsely  settled  districts  decreased  the  density  of  traffic  and 
the  gross  and  net  receipts  per  mile  of  line.  In  1887  the  Rock  Island 
was  earning  the  very  high  return  of  $8899  gross  per  mile  operated ; 
in  1891  this  had  fallen  to  $5126;  in  1887  the  net  return  was  $3478 
per  mile;  in  1891  it  had  fallen  to  $1484;  in  other  Words,  the  new 
mileage  brought  an  increase  in  traffic,  but  not  nearly  .so  great-  a 
traffic  per  mile  as  the  Iowa  and  Illinois  lines  had  enjoyed,  while  .the 
financing  of  the  new  construction  swelled  the  annual  charges  from 
fa* 795>35 1  to  $4,775,6oi,  and  even  with  the  larger  mileage  in- 
creased the  charges  per  mile  from  $1295  in  1887  to  $1400  in  1891. 
We  need  not,  therefore,  be  surprised  that  the  rate  of  dividends 
dropped  from  7  per  cent  to  5}  per  cent  and  then  to  4  per  cent ;  nor 
that  the  price  of  common  stock  fell  from  its  high  level  of  140$  in  May, 
1887,  to  63!  in  March,  1891. 

It  was  in  this  weakened  condition  that  the  Rock  Island  encoun; 
tered  the  panic  of  1893  and  the  years  of  depression  which  followed  j. 

1  Annual  Report,  1891.  *  Ibidf  1889.  *  »  Ibid.  1892.     \ 


ROCK  ISLAND  317 

and  yet,  in  spite  of  the  marked  decrease  in  business  in  the  years 
1895-6-7,  it  continued  to  pay  dividends,  and  showed  no  signs  of 
financial  distress  except  the  lowering  of  its  rate  to  2  per  cent.  As  a 
matter  of  fact  the  road  was  still  in  these  years  one  of  the  strongest  in 
the  United  States.  Its  lines  were  well  located,  its  management  was 
conservative,  and  consequently  trusted,  and  its  credit  was  good ;  so 
that  at  a  time  when  some  of  the  largest  systems  in  the  United  States 
were  being  forced  to  the  wall,  it  was  enabled  to  preserve  its  solvency 
and  even  to  keep  up  fairly  liberal  expenditures  for  maintenance  of 
way  and  rolling  stock.  Little  new  construction  was  of  course 
indulged  in.  In  1892  an  extension  was  begun  from  Minco,  the 
terminus  of  the  Rock  Island  in  the  northwest  corner  of  the  Indian 
Territory,  southwards;  l  in  1893  the  southern  boundary  of  the 
Territory  was  reached,  and  the  Chicago,  Rock  Island  &  Texas  Rail- 
way Company  was  organized  to  build  throug'h  Texas ; 2  and  in 
1894  a  combined  line  was  opened  to  Fort  Worth;  but  exclusive  of 
the  Chicago,  Rock  Island  &  Texas,  the  total  mileage  increased  by 
but  360  miles  between  1890  and  1900,  being  an  average  of  33  miles 
a  year. 

In  1901  Messrs.  William  H.  Moore  and  D.  G.  Reid  were  elected 
directors  in  place  of  Messrs.  H.  M.  Flagler  and  H.  A.  Parker,  and 
a  new  era  in  the  road's  affairs  began.  Mr.  Moore  had  not  long  been 
interested  in  railroad  matters.  Known  as  a  daring  and  successful 
promoter  of  industrial  companies,  he  had  made  large  profits  out 
of  the  organization  of  the  National  Biscuit  and  Diamond  Match 
companies;  had  lost  almost  equally  large  amounts  in  speculation 
which  had  followed,  and  had  then  regained  a  fortune  through  the 
organization  and  promotion  of  companies  which  were  absorbed 
into  the  United  Steel  Corporation.  In  these  last  operations  he  had 
come  into  contact  with  Mr.  W.  B.  Leeds,  who,  though  originally 

1  Annual  Report,  1892. 

2  "With  the  Chicago,  Rock  Island    &  Texas  Railway  Company  this  company 
has  financial  and  traffic  agreements  under  which  the  Chicago,  Rock  Island  &  Pacific 
Railway  Company  supplies  all  funds  necessary  to  build  and  equip  the  road  in  con- 
sideration of  receiving  all  the  stock  and  all  of  the  bonds  of  the  Texas  company,  the 
latter  issued  at  the  rate  of  $15,000  per  mile  of  completed  road  and  additional  for 
equipment  to  an  amount  equal  to  cost  of  the  same,  not  exceeding  $5000  per  mile." 
Annual  Report,  1893.  * 


318  RAILROAD  REORGANIZATION 

a  railroad  man,  had  acquired  wealth  through  a  tin-plate  plant  which 
was  afterwards  turned  over  to  this  same  Steel  Corporation.  Mr. 
Moore  was  apparently  in  1901  seeking  for  an  investment.  He  was 
too  well  acquainted  with  industrial  properties  to  care  to  sink  his 
money  in  them,  while  he  realized  that  for  obvious  reasons  good  rail- 
road property  was  as  safe,  and  might  be  made  as  profitable  as  any- 
thing else  to  which  he  could  turn.  The  Chicago,  Rock  Island  & 
Pacific  was  at  the  time  the  system  most  available  for  his  purpose. 
It  was  not  under  the  control  of  any  large  New  York  interests ;  it  had 
an  excellent  financial  record ;  its  mileage  was  so  placed  as  to  admit 
of  ready  expansion;  and,  moreover,  it  is  probable  that  to  a  man  of 
Mr.  Moore's  speculative  disposition  the  very  low  capitalization  of 
the  road  opened  up  vistas  of  almost  indefinite  increase.1  Just  when 
Mr.  Moore  and  his  friends  began  their  purchases,  and  what  price 
they  paid  is  of  course  largely  a  matter  of  conjecture :  large  blocks  of 
stock  were,  however,  undoubtedly  secured  in  the  early  months  of 
1901,  during  which  time  quotations  ranged  from  n6J  to  136;  and 
it  is  probable  that  the  larger  part  of  the  purchases  were  made  nearer 
the  upper  than  the  lower  level.  During  the  following  year  the  Moore 
party  increased  their  holdings.  It  has  been  said  that  in  April,  1901, 
Messrs.  Moore  and  Reid  were  elected  to  the  directorate.  In  No- 
vember, 1901,  at  a  special  meeting  of  the  stockholders,  the  directors 
were  authorized  to  elect  two  new  members  to  the  executive  commit- 
tee, and  Messrs.  Moore  and  Wm.  B.  Leeds  were  chosen.  In  Febru- 
ary, 1902,  H.  R.  Bishop,  Tracey  Dows,  and  F.  E.  Griggs  resigned, 
and  Geo.  McMurtry,  F.  L.  Hine,  and  F.  S.  Wheeler  were  elected 
directors  in  their  place.  Mr.  McMurtry  had  formerly  been  president 
of  the  American  Sheet  Steel  Company,  merged  in  the  Moore  Steel 
Combine,  and  Mr.  Hines,  vice-president  of  the  First  National  Bank 
of  New  York,  presumably  brought  the  backing  of  that  powerful 
institution.2  Meanwhile  Mr.  James  H.  Moore  had  been  chosen  a 
director,  and  the  Moore  interest  had  gained  control  of  the  execu- 
tive committee,  so  that  a  majority  both  of  that  committee  and  of 

1  Bonded  indebtedness,  1900,  amounted  to  $18,395  per  mile. 
Capital  stock,  1900,  amounted  to  13,711 

$32,106  per  mile. 

2  Ry.  Age,  33:  186,  1902. 


ROCK  ISLAND  319 

the  board  of  directors  was  in  their  hands.  The  new  group  of  capital- 
ists were  not  railroad  men ;  their  training  had  been  on  the  financial 
side  of  corporation  dealings,  and  the  bulk  of  what  experience  they 
had  had  in  actual  management  had  been  derived  from  industrial 
and  not  from  railroad  operations.  It  was  natural,  therefore,  that 
the  most  striking  results  from  their  accession  to  power  should  appear 
on  the  financial  rather  than  on  the  operating  end,  and  that  their 
ability  to  manipulate  stocks  and  bonds  should  prove  more  unques- 
tionable than  their  ability  to  handle  railroad  affairs.  Results  in  the 
development  of  the  Rock  Island  system  were,  however,  attained, 
and  for  two  reasons :  in  the  first  place,  the  Moores  were  able,  and 
above  all  enterprising  men,  and  untrammelled  by  traditions  of  con- 
servatism, they  were  quick  to  see  and  bold  to  execute  plans  made 
possible  by  the  admirable  location  of  their  4000  miles  of  road ;  in 
the  second  place,  they  soon  had  large  blocks  of  securities  which  they 
wished  to  sell,  and  were  impelled  to  undertake  large  operations  in 
the  hope  of  raising  quotations  upon  the  Exchange. 

In  June,  1901,  the  stockholders  authorized  an  increase  in  the 
capital  stock  from  $50,000,000  to  $60,000,000;  stockholders  of 
record  June  28, 1901,  to  have  the  right  to  subscribe  at  par.1  The  pro- 
ceeds were  to  go  in  part  for  extension  from  Liberal,  Kansas,  to 
El  Paso,  Texas,  and  in  part  for  a  new  depot  and  elevation  of  tracks 
in  .Chicago,  and  for  the  improvement  of  the  physical  condition 
of  the  road.  This  El  Paso  extension  plan  was  not  new,  since  in 
December,  1900,  the  Chicago,  Rock  Island  &  Mexico,  and  the 
Chicago,  Rock  Island  &  El  Paso  had  been  incorporated  to  build 
a  line  from  Liberal,  Kansas,  to  Santa  Rosa,  New  Mexico;  there 
to  connect  with  the  El  Paso  &  Northeastern,  and  to  afford  a  through 
route  to  the  Pacific  coast  and  into  Mexico.  The  other  plans  were, 
however,  new.  In  April,  1903,  the  Chicago,  Rock  Island "&  Texas 
filed  an  amendment  to  its  charter  providing  for  an  extension  from 
Fort  Worth  to  Galveston,  295  miles.  The  same  month  the  sale  of 
the  Choctaw,  Oklahoma  &  Gulf  to  the  Rock  Island  was  officially 
confirmed.  This  road  has  been,  with  one  exception,  the  most  im- 

1  Stock  quotations:    June  i,  1901  156! 

July  i,  loot  155! 

July  12,  100 1  132$ 


320  RAILROAD  REORGANIZATION 

portant  acquisition  of  the  Moores.  It  stretches  from  Memphis, 
Tennessee,  through  the  Indian  Territory,  Arkansas,  and  Oklahoma, 
to  the  border  line  of  Texas,  and  furnishes  a  nearly  direct  line  from 
those  states  to  the  Mississippi  River;  while  a  projected  extension 
to  New  Mexico  will  connect  with  the  Rock  Island  main  lines  to  the 
southward,  and  make  it  a  valuable  link  in  the  through  route  from 
El  Paso  to  Memphis  and  Birmingham.  The  Rock  Island  paid  $80 
a  share  for  the  common  stock  and  $60  for  the  preferred,1  and  under 
the  terms  of  the  sale  agreed  to  take  at  the  same  price  all  stock  offered. 
The  premium  was  very  large.  Choctaw  preferred  had  been  paying 
5  per  cent  for  some  years,  and  the  common  had  received  2  per  cent 
in  1889,  4  per  cent  in  1900,  and  4j  per  cent  in  1901,  plus  10  per  cent 
in  stock;  but  reckoned  on  a  basis  of  120  and  160  respectively,  these 
returns  sank  to  a  very  modest  rate.  The  property  is  a  valuable  one, 
but  will  have  to  show  great  development  to  justify  its  purchase  price. 
Payment  was  made  by  the  issue  of  collateral  trust  4  per  cent  bonds 
to  the  amount  of  $23,520,000,  in  return  for  which  practically  all  oi 
both  issues  of  stock  were  deposited.  Certain  smaller  roads  were 
also  bought  in.  In  June,  1902,  the  stockholders  voted  to  increase 
the  capital  stock  from  $60,000,000  to  $75,000,000;  and  in  July  the 
directors  decided  to  allow  the  stockholders  to  subscribe  at  par  for 
$8,235,000  of  the  new  issue  in  amounts  equal  to  12  J  per  cent  of 
their  holdings ;  —  the  new  stock  to  take  up  shares  of  the  Burlington, 
Cedar  Rapids  &  Northern,  the  Rock  Island  &  Peoria,  and  the 
St.  Louis,  Kansas  City  &  Colorado.2  The  first  of  these  roads  con- 
nected the  Rock  Island  system  with  Minneapolis  and  St.  Paul.3 
The  Rock  Island  &  Peoria  was  a  short  line  in  the  state  of  Illinois. 
The  St.  Louis,  Kansas  City  &  Colorado  was  to  afford,  when  finished, 
a  more  direct  route  between  the  important  cities  of  St.  Louis  and 
Kansas  City.  J 

This  is  where  matters  stood  when  the  reorganization  plan  of 
August,  1902,  was  brought  forward.  There  had  been  a  refunding 
put  through  in  1897  whereby  some  simplification  of  bond  issues  had 

1  The  par  was  $50  for  both  common  and  preferred. 

2  R.  R.  Gaz.  34:  562,  1902. 

8  This  line  had  been  leased  before,  and  the  majority  of  its  stock  and  that  of  the 
Rock  Island  &  Peoria  had  been  owned  by  the  Chicago,  Rock  Island  &  Pacific. 


ROCK  ISLAND  321 

been  secured;1  but  this  scheme  of  1902  was  for  a  different  purpose 
and  differed  radically  in  the  methods  employed.  Its  explanation 
is  to  be  found  in  the  character  of  the  men  in  control.  We  have  seen 
that  Mr.  Moore  had  made  his  reputation  in  the  speculative  promo- 
tion of  industrial  combinations,  that  he  had  entered  Rock  Island  in 
search  of  an  investment,  and  that  he  had  thrown  himself  into  the 
extension  of  the  system  in  part  because  he  saw  the  opportunity  for 
development,  in  part  because  he  hoped  to  pave  the  way  for  profit- 
able manipulation  of  the  stock.  The  time  he  had  awaited  seemed 
now  to  have  arrived.  His  projects  had  caught  public  attention,  com- 
ment on  the  whole  had  been  favorable,  and  the  price  of  his  shares 
was  at  a  high  level ;  all  indications  pointed  to  the  probable  success 
of  a  scheme  of  stock-watering  on  an  enormous  scale.  At  the  same 
time  Mr.  Moore  was  too  well  pleased  with  the  position  he  had  at- 
tained to  wish  to  sacrifice  it  by  the  sale  of  his  holdings;  and  his 
desire  was,  therefore,  to  devise  an  arrangement  whereby  the  stock 
of  the  Rock  Island  should  be  inflated  and  large  blocks  sold  to  the 
confiding  public,  while  the  control  should  remain  where  it  had  been 
before,  —  in  the  hands  of  Mr.  Moore  and  his  followers.  It  is  to  be 
noticed  that  there  was  no  call  for  a  reorganization  by  the  creditors 
of  the  road,  and  no  question  of  a  default  in  interest,  or  even  of  a 
cessation  of  dividends  upon  the  common  stock;  nor,  on  the  other 
hand,  were  earnings  so  great  that  the  managers  felt  it  unwise  to  dis- 
tribute them.  The  reason  for  the  reorganization  was  entirely  the 
financial  ambition  of  the  Moore  group  and  the  chance  which  its 
members  saw  of  making  larger  profits  than  the  earnings  of  the  pro- 
perty would  ever  bring. 

With  these  objects  the  following  plan  was  put  through.  Instead 
of  one  Chicago,  Rock  Island  &  Pacific  Company  the  Moores  now 
proposed  to  have  three  companies,  of  which  one  was  to  operate 
the  railroad,  one  was  to  hold  the  stock  of  the  operating  company, 
and  one  was  to  hold  the  stock  of  the  company  which  held  the  stock 
of  the  operating  company.  That  is  to  say,  the  Chicago,  Rock  Island 
&  Pacific  Railway  Company  was  left  undisturbed,  while  in  Iowa 
a  Chicago,  Rock  Island  &  Pacific  Railroad  Company  was  formed 
to  hold  the  stock  of  the  Railway  Company,  and  in  New  Jersey 

1  See  financial  papers  for  1897. 


322  RAILROAD  REORGANIZATION 

a  Rock  Island  Company  was  organized  to  hold  the  stock  of  the  Rail- 
road Company,  and  of  such  acquisitions  as  might  afterwards  be 
made.  The  retention  of  the  Railway  Company  made  unnecessary 
the  consent  of  creditors,  for  the  lien  and  interest  rate  of  outstanding 
bonds  remained  the  same  as  before ;  the  formation  of  the  Railroad 
Company  served  apparently  to  meet  legal  requirements;  and  the 
organization  of  the  Rock  Island  Company  seemed  likely  to  make 
more  easy  the  purchase  of  parallel  and  competing  lines.  But  the 
great  advantage  of  the  new  companies  lay  in  the  opportunities  for 
stock  inflation  which  they  presented,  together  with  the  lessening  of 
the  amount  of  capital  required  for  control.  This  appears  plainly 
in  the  following :  The  old  Railway  Company  had  a  capital  stock  of 
$75,000,000;  the  new  Railroad  Company  issued  stock  to  the  amount 
of  $125,000,000  and  4  per  cent  bonds  to  the  amount  of  $75,000,000. 
The  Rock  Island  Company  issued  common  stock  to  a  total  of 
$96,000,000  and  preferred  stock  to  a  total  of  $54,000,000 ;  and  the 
aggregate,  excluding  the  undisturbed  bonds  of  the  Railway  Com- 
pany, footed  up  to  $425,000,000  instead  of  to  $75,000,000  as  before. 
From  this  total  must  be  deducted  $200,000,000,  which  represented 
issues  of  stock  by  one  company  to  another,  and  $21,000,000  Rock 
Island  Company  stock  and  $1,500,000  Railroad  Company  bonds 
reserved  for  future  extension,  leaving  a  net  increase  from  $75,000,- 
ooo  to  $202,500,000.  This  involved  some  increase  in  fixed  charges, 
since  4  per  cent  on  $75,000,000  became  obligatory;  but  the  true 
significance  lay  in  the  inflation  of  principal  rather  than  in  the  in- 
crease of  interest  charges,  opening  as  it  did  an  opportunity  for  great 
profit  to  the  managers  in  the  sale  of  the  new  securities.  An  incidental 
result  was  the  transformation  of  the  Rock  Island  shares  from  in- 
vestment securities  to  media  for  speculation.  At  the  same  time  the 
investment  required  for  control  was  diminished.  $75,000,000  of 
Railway  stock  was  exchanged  for  $75,000,000  Railroad  bonds, 
$96,000,000  Rock  Island  Company  common  stock,  and  $54,000,000 
Rock  Island  Company  preferred  stock.  Of  these  the  bonds  ob- 
viously had  no  voting  rights.  To  both  the  common  and  preferred 
stock  the  right  to  vote  was  given,  but  in  unequal  degrees.  "  Until 
the  number  thereof  shall  be  increased,"  read  the  certificate  of  in- 
corporation of  the  Rock  Island  Company,  "the  number  of  directors 


ROCK  ISLAND  323 

shall  be  nine.  There  shall  be  five  classes  of  directors.  The  first  class 
shall  contain  a  majority  of  the  whole  number  of  the  directors  as 
fixed  at  any  time  by  the  by-laws.  .  .  .  The  holders  of  the  preferred 
stock  shall  have  the  right,  to  the  exclusion  of  the  holders  of  the  com- 
mon stock,  to  choose  directors  of  the  first  class.  ..."  In  other 
words,  to  the  preferred  stock,  which  constituted  a  minority  of  the 
whole,  was  given  the  right  to  elect  a  majority  of  the  board  of  directors ; 
so  that  \vhereas  in  the  old  Railway  Company  51  per  cent  of  $75,000,- 
ooo  common  stock,  selling  at  from  120  to  179,  had  been  required  for 
control,  in  the  new  combination  of  companies  51  per  cent  of  $54,000,- 
ooo  Rock  Island  Company  preferred  stock,  selling  at  83^,  was  suffi- 
cient to  the  same  end,  in  spite  of  a  doubling  of  the  stock  outstanding. 
To  repeat :  Two  new  corporations  were  formed,  of  which  the 
Chicago,  Rock  Island  &  Pacific  Railroad  Company  of  Iowa  issued 
$125,000,000  stock  to  the  Rock  Island  Company  of  New  Jersey,  and 
in  return  received  $127,500,000  Rock  Island  preferred  and  common 
stock.  With  this  stock,  and  with  $75,000,000  of  its  own  bonds,  the 
Railroad  Company  purchased  the  $75,000,000  stock  of  the  Chicago, 
Rock  Island  &  Pacific  Railway  Company,  paying  for  every  $100 
in  shares  C*^^^.  . 

$100  in  Rock  Island  Company  common  stock; 
70  in  Rock  Island  Company  preferred  stock;  and 
100  in  its  own  4  per  cent  bonds. 

The  Railway  shares  acquired  were  pledged  for  the  Railroad  bonds, 
and  from  them  came  the  total  income  of  the  Railroad  Company ;  and 
dividends  upon  the  Railroad  shares,  together  with  dividends  upon 
shares  of  other  companies  which  it  might  chance  to  own,  constituted 
the  total  income  of  the  Rock  Island  Company.  After  thus  receiving 
indirectly  the  earnings  of  the  Railway  Company  through  two  sets  of 
dividends,  the  Rock  Island  Company  paid  dividends  on  its  own 
shares,  which  were  held  by  the  public;  the  preferred  stock  being 
entitled  to  4  per  cent  from  1903  to  1909  inclusive,  to  5  per  cent  from 
1910  to  1916  inclusive,  and  to  6  per  cent  thereafter. 

Other  provisions  were  as  follows :  The  Rock  Island  common  stock 
might  be  increased  from  time  to  time  according  to  law,  but  the 
amount  of  the  preferred  stock  could  not  be  increased  except  with  the 
assent  of  the  holders  of  two-thirds  of  the  entire  preferred  stock  and 


324  RAILROAD  REORGANIZATION 

two-thirds  of  the  entire  common  stock  at  the  time  outstanding,  given 
at  a  meeting  called  for  that  purpose.  Preferred  stock  was  to  be  pre- 
ferred as  to  principal  as  well  as  to  interest ;  it  had  the  right,  as  has 
been  said,  to  elect  a  majority  of  the  board  of  directors,  but  this  right 
could  be  surrendered  by  the  affirmative  vote  of  the  holders  of  two- 
thirds  in  amount  of  the  preferred  stock  at  the  time  outstanding  at  a 
special  meeting  of  the  holders  of  the  preferred  stock  called  for  that 
purpose.  A  Finance  Committee  might  be  appointed  from  and  by  the 
directors  which  should  have  such  powers  as  the  directors  and  stock- 
holders should  choose  to  give  it,  and  which  should  have  all  the  powers 
of  the  directors  when  the  board  was  not  in  session.  The  directors 
might  accumulate  working  capital,  but  no  reservation  for  working 
capital  should  be  made  in  any  year  out  of  the  surplus  or  net  profits 
of  such  year  until  after  the  payments  for  such  year  of  the  dividends 
on  the  preferred  stock  of  the  company.  The  directors  might  also  use 
the  working  capital  in  purchasing  or  acquiring  the  shares  of  the 
capital  stock  of  the  company  as  they  might  deem  expedient,  but 
shares  so  purchased  might  be  resold  unless  retired  for  the  purpose  of 
decreasing  the  capital  stock  of  the  company.1  This  last  provision 
aroused  so  much  criticism  that  the  directors  gave  up  the  right  of 
dealing  in  the  shares  of  their  own  company  by  resolution  of  Novem- 
ber 5,  1902. 

The  important  features  of  this  reorganization  were,  as  has  been 
indicated,  those  in  connection  with  the  inflation  of  the  capitalization 
and  with  the  control  of  the  property.  In  this  connection  it  may  be 
asked,  first,  whether  the  Moores  made  a  profit  by  the  deal ;  second, 
how  large  an  investment  they  have  had  to  keep  in  the  property  in 
order  to  retain  control;  and  third,  what  cost  to  them  this  investment 
represents. 

On  January  2,  1902,  Chicago,  Rock  Island  &  Pacific  Railway 
Company  common  was  quoted  at  154.  On  February  i  it  was  162}, 
on  April  i,  179,  on  July  i,  172^,  on  August  i,  190,  on  October  i,  200, 
and  on  November  i,  199^.  It  is  safe  to  assume  that  the  rise  from 
172  J  to  200  was  due  to  the  publication  of  the  plan,  and  it  may  be  that 
some  of  the  earlier  increase  in  value  was  owing  to  purchases  by 
insiders,  or  by  people  who  had  obtained  some  inkling  of  what  was 

1   Annual  Report,  1903. 


ROCK  ISLAND  325 

being  considered ;  but  a  comparison  of  the  aggregate  value  of  the 
securities  given  for  the  railway  common  stock  on  January  3,  1903, 
with  the  price  of  the  stock  on  July  i,  1902,  shows  that  the  former 
exceeded  the  latter  by  22.3  points,  with  the  error  tending  toward  an 
understatement  of  the  excess.  That  is,  for  every  $172}  invested  in 
July,  1902,  the  Moores,  and  other  stockholders  with  them,  held 
securities  worth  $194.8  in  January  of  the  following  year.  During 
1903  the  Rock  Island  securities  fell  with  others  upon  the  market,  till 
on  January  2,  1904,  the  aggregate  value  of  the  stocks  and  bonds  in 
question  was  only  $132.2;  but  the  decline  was  temporary,  and  by 
January  3,  1905,  recovery  to  $176.6  had  taken  place.  The  operations 
therefore  did  result  in  a  chance  for  large  profits,  and  gave  renewed 
evidence  that  the  public  demand  for  stocks  and  bonds  does  not  fall  off 
proportionately  to  an  increase  in  their  volume.1 

It  is  obvious  that  neither  before  nor  after  the  reorganization  could 
the  Moores  have  sold  all  their  holdings  and  yet  have  kept  control. 
Starting  again  with  the  price  of  172^  for  Chicago,  Rock  Island  & 
Pacific  Railway  common  on  July  i,  1902,  it  may  be  calculated  that 
the  cost  of  a  majority  of  the  issue  then  footed  up  to  $64,687,672.  If 
this  had  been  carried  on  margin,  and  the  brokers  had  demanded  on 
every  share  a  deposit  of  $40,  with  $40  more  instantly  available  if 
needed,  the  total  investment  required  for  control  would  have  been 
$15,000,040,  with  as  much  more  held  in  readiness  for  any  emergency. 
On  January  2,  1903,  Rock  Island  preferred  stock  was  selling  at  83  J, 
and  the  cost  of  a  majority  of  the  whole  issue  would  have  been  $22,- 
545,083 ;  which,  if  carried  on  margin  with  a  deposit  of  $20  a  share, 
would  have  represented  an  investment  of  $5,400,020,  with  as  much 
more  in  reserve.  In  other  words,  while  all  went  well,  less  than 
$i  1,000,000  sufficed  to  control  properties  with  a  total  mileage  of  7718 
miles  of  line,  a  bonded  indebtedness  of  $201,660,475,  and  an  out- 
standing capital  stock  of  $118,249,007.  It  is  of  course  improbable 
that  the  Moores  in  1903  carried  all,  or  even  a  large  part  of  their 
holdings  on  margin ;  supposing,  therefore,  that  all  of  their  stock  was 

1   Quotations  of  securities  : 

Jan.  2,  1903  Jan.  2,  1904  Jan.  2,  1905 

Rk.  I.  Co.  common  stock  49  22$  36^ 

Rk.  I.  Co.  preferred  stock  83$  6r  84 

C,  R.  I.  &  P.  R.  R.  Co.  4  per  cent  bonds  87!  66f  8i| 


326  RAILROAD  REORGANIZATION 

bought  and  paid  for,  the  fact  still  remains  that  with  $22,545,083  they 
were  able  to  control  a  system  capitalized  at  $319,909,482.  \S 

In  examining  the  cost  to  the  Moores  it  is  at  once  to  be  said  that 
these  gentlemen  did  not  pay  172^  for  their  old  Railway  stock.  What 
they  did  pay  is  of  course  uncertain.  It  is  known  that  much  of  their 
holdings  was  acquired  in  the  early  months  of  1901,  when  prices 
ranged  from  n6|  to  136.  An  average  of  140  would  represent  a  con- 
servative estimate  of  what  they  paid,  at  which  price  a  majority  of  the 
$75,000,000  would  have  cost  $52,500,140.  In  return  for  this  stock, 
at  the  prices  of  January  2,  1903,  they  obtained 

$18,375,049  in  Rock  Island  Company  common  stock, 
21,918,808  in  Rock  Island  Company  preferred  stock,  and 
32,765,712  in  Chicago,  Rock  Island  &  Pacific  Railroad  Company  4  per  cent 
bonds. 

Since  the  preferred  stock  sufficed  for  control,  there  were  left 
$18,375,049  of  Rock  Island  Company  common,  and  $32,765,712  of 
Railroad  Company  bonds,  or  a  total  of  securities  with  a  nominal  mar- 
ket valueof  $51,140,761.  Deducting  this  from  the  original  investment, 
which  has  been  estimated  at  $52,500,140,  there  is  left  $1,359,379  to 
represent  the  actual  cost  to  the  Moore  crowd  of  control  of  the  great 
Rock  Island  property.  Beneath  all  of  these  figures  lies,  of  course,  the 
erroneous  assumption  that  it  would  have  been  possible  to  unload 
large  blocks  of  securities  upon  the  market  without  causing  a  break 
in  price ;  and  yet,  though  large  deductions  must  be  made  on  this 
account,  the  figures  are  eloquent  of  the  skill  with  which  the  Moores 
have  manipulated  Rock  Island  issues,  and  of  the  slender  basis  on 
which  their  control  rests.  It  has  been  truly  said  that  the  question  is 
raised  anew  as  to  what  is  legitimate  in  corporate  finance. 

All  this  is  very  different  from  anything  described  before ;  and  so  far 
as  motives  go,  the  two  Rock  Island  reorganizations  stand  by  them- 
selves. In  the  matter  of  methods  some  similarities  appear.  The 
great  increase  in  capitalization  resting  on  the  Rock  Island  system 
was  accomplished  mainly  by  an  inflation  of  stock,  not  of  mortgage 
bonds,  and  involved  a  comparatively  slight  increase  in  fixed  charges ; 
the  Rock  Island  Company  closely  resembled  other  holding  com- 
panies in  its  method  of  operation,  and  seemed  likely  to  offer  some 
facilities  for  the  consolidation  of  competing  lines ;  and  though  the 


ROCK  ISLAND  327 

extraordinary  privileges  given  the  Rock  Island  preferred  stock  have 
perhaps  never  been  paralleled  in  degree,  the  practice  of  granting 
such  stock  preferential  treatment  in  other  things  than  dividends  is 
not  unknown.  On  the  whole,  however,  this  kind  of  reorganization 
stands  apart,  and  is  rather  instructive  as  showing  what  may  be  done 
in  the  handling  of  corporation  securities  than  in  indicating  any 
sound  principles  on  which  bankrupt  roads  may  proceed. 

The  reorganization  plan  aroused  sharp  criticism  both  from  Wall 
Street l  and  from  the  wider  public,  but  met  no  opposition  sufficient  to 
prevent  its  being  carried  through.  In  September  Attorney- General 
C.  W.  Mullen,  of  Iowa,  in  an  opinion  filed  with  the  Governor  of  that 
state,  held  that  the  acts  of  the  new  Iowa  corporation  of  the  Rock 
Island,  *'.  e.  the  Chicago,  Rock  Island  &  Pacific  Railroad  Company, 
were  not  outside  the  powers  conferred  by  statute.2  The  Governor,  in 
concurring  with  the  opinion  from  a  legal  point  of  view,  added,  "the 
thing  done  is  neither  a  merger  nor  a  consolidation.  Not  a  mile  of  track 
nor  a  dollar  in  value  is  added  to  the  Rock  Island  property.  It  is 
simply  a  new  device  for  watering  securities ;  it  is  for  the  next  General 
Assembly  to  say  whether  it  is  wise  to  permit  our  laws  to  so  remain  that 
such  things  are  possible."3  The  various  corporations  were,  there- 
fore, organized,  and  the  various  issues  of  stocks  and  bonds  put  forth. 

During  the  past  four  years  the  events  which  require  mention  are 
four :  First,  the  acquisition  of  the  St.  Louis  &  San  Francisco ;  second, 
the  connection  of  the  Rock  Island  with  the  Gulf;  third,  the  tempor- 
ary control.of  the  Chicago  &  Alton;  and  fourth,  the  issue  of  a  new 
refunding  mortgage. 

*  In  October,  1903,  the  Rock  Island  operated  7 1 23  miles  of  line.  Its 
tracks  stretched  southwest  from  Chicago  to  Santa  Rosa,  New  Mex- 
ico, west  from  Memphis  to  Tucumcari,  and  northwest  from  Rock 
Island,  Illinois,  to  Minneapolis  and  St.  Paul,  and  to  Watertown, 
South  Dakota.  This  extensive  mileage  surrounded,  however,  instead 
of  occupying,  a  large  territory  in  Missouri,  Kansas,  Indian  Territory, 
and  Arkansas,  and  could  claim  no  share  in  the  vast  traffic  passing 
up  and  down  the  Mississippi  Valley.  One  of  the  first  acts  of  the 
Moores  was  to  remedy  this  defect.  In  May,  1903;  the  .Rock  Island 

1  Chron.  75-212,  1902.  »  Ryf  Age,  34:  301,  1902. 

»  R.  R.  Gaz.  34:  750,  1902. 


328  RAILROAD  REORGANIZATION 

made  a  formal  offer  to  purchase  any  and  all  shares  of  the  St.  Louis 
&  San  Francisco  Railroad  Company,  providing  $22,500,000  in  par 
value  should  accept,  at  a  rate  of  $60  par  value  in  the  common  stock 
of  the  Rock  Island  Company  and  $60  par  value  in  a  new  issue  of 
5  per  cent  gold  bonds  of  1913  of  the  Chicago,  Rock  Island  &  Pacific 
Railroad  Company,  for  each  $100  par  value  of  Frisco  common  stock 
deposited ;  the  new  bonds  to  be  secured  by  the  stock  acquired.  This 
Frisco  Company,  it  will  be  remembered,  was  the  same  that  had  previ- 
ously been  acquired  and  given  up  by  the  Atchison,  Topeka  &  Santa 
Fe.  Since  that  time  it  had  greatly  extended  its  mileage,  had  gained 
control  of  the  prosperous  Chicago  &  Eastern  Illinois,  with  entrance 
into  Chicago,  and  was  altogether  more  valuable  than  it  had  been 
before.  In  relation  to  the  Rock  Island  it  possessed  precisely  the  mile- 
age which  was  required.  It  connected  the  latter 's  terminus  at  Chicago 
with  the  terminus  of  the  Choctaw,  Oklahoma  &  Gulf  at  Memphis ;  it 
traversed  Southern  Illinois,  Southern  Missouri,  Southeastern  Kansas, 
and  Indian  Territory,  to  say  nothing  of  lines  in  Oklahoma  and  in 
Texas ;  and  by  means  of  a  line  from  Memphis  to  Birmingham  it  gave 
entrance  into  the  heart  of  the  South.  In  brief,  it  filled  the  gaps  in  the 
southeastern  part  of  the  Rock  Island  system,  and  afforded  a  solid 
foundation  for  further  expansion.  Good  authorities  consider  the  price 
which  the  Rock  Island  gave  for  the  Frisco  to  have  been  too  high.  It  is 
certain  that  the  Frisco  stockholders  jumped  at  the  chance.  By  June  i , 
1903,  the  necessary  $2 2, 500,000  worth  of  stock  had  given  their  con- 
sent and  only  technical  details  remained  to  be  carried  through.1 

With  the  St.  Louis  &  San  Francisco  under  its  control  the  Rock 
Island  could  make  a  final  advance  to  the  Gulf.  An  attempt  to  com- 
plete a  road  through  Texas  occurred  simultaneously  with  the  Frisco 
purchase  in  1903.  The  Moores,  that  is,  arranged  with  the  Southern 
Pacific  for  the  purchase  of  a  half-interest  in  the  Houston  &  Texas 

1  Previous  to  this  the  stockholders  of  the  Chicago,  Rock  Island  &  Pacific  Rail- 
road Company  had  approved  the  deal,  had  authorized  the  new  bonds  of  1913,  and 
had  voted  to  increase  the  capital  stock  of  their  company  $20,000,000,  which  increase 
was  turned  into  the  treasury  of  the  Rock  Island  Company  of  New  Jersey,  in  return 
for  an  equal  amount  of  this  latter  company's  stock.  It  is  worth  noting  that  the 
purchase  was  to  be  made  by  Railroad  Company  and  not  by  Rock  Island  Company 
bonds,  although  the  desire  of  the  management  was  ultimately  to  see  the  indebted- 
ness of  all  subsidiary  roads  replaced  by  Rock  Island  Company  bonds. 


ROCK  ISLAND  329 

Central,  from  Fort  Worth  to  Houston  and  Galveston,  with  a  branch 
to  Austin,  Texas ;  the  Houston,  East  &  West  Texas,  extending  north 
from  Houston  to  Shreveport,  Louisiana;  and  the  Texas  &  New 
Orleans,  from  Dallas  to  Sabine  Lake  on  the  Gulf  of  Mexico.  As  a 
part  of  the  agreement  the  presidents  of  these  lines  were  to  be  selected 
by  the  Rock  Island  Company.1  This  would  have  established  a  line 
to  the  coast  in  a  very  satisfactory  manner.  Connection  between 
Dallas  and  Fort  Worth  was  to  be  completed  hi  December,  1903, 
and  from  this  point  the  two  lines  of  the  Houston  &  Texas  Central 
and  the  Texas  &  New  Orleans  would  have  furnished  direct  outlets 
to  the  Gulf.  The  scheme  did  not  go  through,  because  the  Texas 
Railroad  Commissioners  pronounced  the  contracts  contrary  to  the 
state  constitution,  in  that  they  amounted  to  a  consolidation  of  the 
corporations  concerned,  and  to  the  establishment  of  a  community 
of  interest  between  the  Rock  Island  and  the  Southern  Pacific,  which 
would  preclude  competition  between  them  in  respect  to  their  Texas 
business.2  The  Rock  Island  was  at  first  disposed  to  test  part  of  the 
decision  in  the  courts.8  It  later  decided  that  discretion  was  the 
better  part  of  valor,  stopped  the  transaction,  and  cancelled  the  stock 
which  it  had  issued  as  part  of  the  purchase  price.4 

What  the  company  could  not  do  in  Texas  it  could  do,  however, 
in  Missouri,  Louisiana,  and  Arkansas.  As  early  as  November,  1902, 
the  St.  Louis  &  San  Francisco  had  purchased  the  entire  capital 
stock  of  the  St.  Louis,  Memphis  &  Southeastern  Railroad,  a  line 
which  was  opened  from  St.  Louis  in  1904  to  a  junction  with  a  branch 
of  the  Frisco  above  Memphis.  From  Memphis  the  Kansas  City, 
Memphis  &  Birmingham  stretched  southeast  through  Mississippi 
into  Alabama.  These  roads  formed  a  basis  for  extension  which  was 
practicable  though  less  convenient  than  the  western  route.  Accord- 
ingly, in  1904,  trackage  agreements  were  concluded  which  gave 
to  the  Rock  Island  system : 

(1)  Trackage  rights  over  the  Mobile  &  Ohio  and  the  New  Orleans 
&  Northeastern  between  Tupelo,  Mississippi  (on  the  Kansas  City, 
Memphis  &  Birmingham),  and  New  Orleans,  Louisiana. 

(2)  Trackage  rights  over  the  St.  Louis,  Iron  Mountain  &  Southern 

1  Ry.  Rev.  43:  408,  1903.  *  Chron.  76:  1192,  1903. 

3  Ry.  Age,  36:  i,  1903.  *  Ry.  Age,  37:  1153,  1904. 


330  RAILROAD  REORGANIZATION 

and  the  Texas  &  Pacific  from  a  point  opposite  Memphis,  Tennessee, 
to  a  point  opposite  Baton  Rouge,  Louisiana. 

(3)  Trackage  rights  over  the  Yazoo  &  Mississippi  Valley  between 
Baton  Rouge,  Louisiana,  and  New  Orleans,  Louisiana,  and  over 
certain  tracks  in  the  latter  city. 

This  afforded  alternative  routes  of  considerable  directness  from 
Memphis  to  the  Gulf,  while  from  the  junctions  of  the  Frisco  with 
the  Southern  roads  freight  could  be  sent  north  to  St.  Louis  and 
Chicago  over  the  Rock  Island  system's  own  rails.  Arrangements 
were  made  for  the  construction  of  terminals  in  New  Orleans  by  a 
subsidiary  company  whose  stock  was  to  be  owned  and  whose  bonds 
were  to  be  guaranteed  by  the  Southern  and  the  St.  Louis  &  San 
Francisco  companies.1 

At  the  present  time  the  Rock  Island  is  reaching  south  at  two  points 
other  than  those  so  far  mentioned.  Under  the  name  of  the  Rock 
Island,  Arkansas  &  Louisiana  Railroad  Company,2  it  has  built 
almost  due  south  from  Little  Rock,  Arkansas,  while  from  New  Or- 
leans to  Houston  it  has  completed  a  line  which  connects  at  Eunice, 
Louisiana,  with  the  Rock  Island,  Arkansas  &  Louisiana,  and  at 
Houston  with  the  Trinity  &  Brazos  Valley  Railway.3  This  last  line 
runs  from  Houston  to  Fort  Worth  and  Dallas,  Texas,  and  is  con- 
trolled by  a  half-interest  in  its  capital  stock.  The  Rock  Island  is 
thus  in  fair  shape  to  share  in  the  south-bound  grain  movement  from 
Kansas,  Nebraska,  and  the  Dakotas,  and  to  take  a  part  in  the  north 
and  south  business  of  the  Mississippi  Valley.  There  is  no  question 
but  what  the  company  is  making  a  bold  bid  for  an  enormous  traffic, 
and  that  failure  will  not  be  due  to  any  narrowness  of  view. 

About  the  time  that  it  was  struggling  to  reach  the  Gulf  the  Rock 
Island  took  hold  of  the  Chicago  &  Alton  in  the  north  in  order  to  have 
another  and  a  more  direct  line  between  Kansas  City  and  Chicago. 

1  See  the  Annual  Report  of  the  St.  Louis  &  San  Francisco  Railroad  for  1904. 

2  A  consolidation  in   1905  of  the  Arkansas  Southern  Railroad  Company,  the 
Arkansas  &  Louisiana  Railroad  Company,  and  the  Little  Rock   &  Southern  Rail- 
road Company.    See  the  Annual  Report  of  the  Chicago,  Rock  Island    &  Pacific 
Railroad  Company  for  1906. 

8  See  letter  from  Mr.  C.  W.  Hilliard,  vice-president  of  the  Colorado  Southern, 
New  Orleans  &  Pacific  Railroad,  and  comptroller  of  the  St.  Louis  &  San  Francisco 
Railroad  Company,  in  Chron.  84 :  507,  1907. 


ROCK  ISLAND  331 

A  strong  minority  interest  had  previously  been  bought  in  the  Alton 
by  Mr.  Harriman,  and  a  board  of  directors  had  been  elected.  In 
1904  the  Rock  Island  bought  within  a  few  hundred  shares  of  abso- 
lute control,  and  since  the  classification  of  the  board  prevented  the 
displacement  of  its  opponents  for  two  years,  arranged  a  compromise. 
Between  them  the  Harriman  and  the  Rock  Island  interests  deposited 
a  controlling  number  of  Alton  shares  with  the  Central  Trust  Com- 
pany of  New  York,  to  be  held  in  a  voting  trust.  Each  of  the  rival 
interests  was  to  have  five  directors,  and  the  odd  director  was  to  be 
in  alternate  years  first  a  Harriman  and  then  a  Rock  Island  man.1 
The  Rock  Island  was,  further,  to  have  an  option  on  the  Harriman 
holdings  for  two  years.  It  was  an  unfortunate  time  to  buy.  Mr. 
Harriman  had  previously  displayed  his  splendid  dividend  pro- 
ducing ability  in  Alton  finance,  and  the  road  was  short  of  money. 
Market  conditions  were  unfavorable,  bonds  were  hard  to  sell,  and, 
after  all,  the  Alton  was  not  of  vital  importance  to  the  Rock  Island, 
although  it  opened  up  new  territory  of  some  considerable  import- 
ance. By  1907  it  seems  that  the  Moores  had  become  tired  of  their 
bargain.  In  June  of  that  year  they  served  notice  on  the  Union  Pacific 
that  the  compromise  agreement  of  1904  was  illegal  and  should  be 
abrogated ; 2  and  shortly  after  they  sold  their  holdings  to  the  Toledo, 
St.  Louis  &  Western.3 

All  in  all  the  growth  of  the  Rock  Island  has  been  astounding. 
Instead  of  the  limited  number  of  7123  miles  which  the  system  pos- 
sessed in  1903,  or  the  3819  of  1901,  it  comprises  14,270  miles  of  line 
operated  in  1907.  Gross  earnings  are  $112,464,000  in  1907  as  against 
$25,365,000  in  1901 ;  net  income  $40,828,000  instead  of  $8,901,000; 
capitalization  about  $525,000,0.00  instead  of  $118,081,000.  In  fact, 
the  very  size  of  the  system  and  the  diverse  nature  of  its  interests 
make  the  economical  management  of  the  whole  almost  beyond  the 
capacity  of  any  one  man.  The  Rock  Island  handles  .traffic  from 
the  West  and  South  to  Chicago,  St.  Louis,  and  Birmingham,  and 
connects  with  the  trunk  lines  to  the  Atlantic  coast ;  it  is  also  striving 
to  receive  and  care  for  the  constantly  increasing  business  from  the 
Northwest  to  the  Gulf.  It  reaches  into  Mexico ;  it  extends  into  Colo- 
rado, and  sends  branches  into  the  Northwest ;  while  at  the  other  end 

1  After  October,  1906.      2  Ry.  World,  51:  531,  1007.       8  Chron.  85:  468,  1907. 


332  RAILROAD  REORGANIZATION 

it  connects  Kansas  City,  Memphis,  and  St.  Louis  by  a  triangle  of 
lines.  It  was  remarked  a  year  ago  that  a  contrast  between  the  opera- 
tions of  the  Rock  Island  and  of  the  Atchison  lines  in  the  Southwest 
disclosed  what  might  be  called  demoralization  on  the  part  of  the 
former,  and  it  is  in  the  multiplicity  of  its  operations  that  the  cause 
must  be  sought. 

It  is  to  be  expected,  therefore,  that  the  financial  position  of  the 
company  should  not  be  secure.  Operating  expenses,  fixed  charges, 
and  taxes  absorbed  87  per  cent  of  gross  income  in  1907  and  89  per 
cent  the  year  before.  We  must  not  be  blinded  by  the  magnitude  of 
the  reported  figures.  Although  $9,476,397  were  carried  to  surplus 
hi  the  year  ending  June  30,  1907,  and  $5,568,092  were  paid  out  in 
dividends,  these  two  items  together  comprise  only  about  13  per  cent 
of  gross  income,  and  a  bad  year  might  readily  see  a  decrease  suf- 
ficient to  sweep  this  margin  away.  Unlike  the  Union  Pacific  and 
the  Northern  Pacific,  moreover,  the  Rock  Island  has  not  made  con- 
sistently heavy  improvement  expenditures  from  income.  Less  than 
$40,000  was  deducted  by  either  the  Frisco  or  the  Rock  Island  & 
Pacific  Railway  in  1905  or  in  1907 ;  less  than  half  a  million  in  1904; 
a  little  over  two  millions  in  1903  and  hi  1906.  And  this  in  spite  of 
the  fact  that  the  mileage  of  the  Rock  Island  system  is  greater  than 
that  of  any  other  road  which  this  study  has  taken  up.  The  fate  of 
the  company's  refunding  mortgage  of  1904  probably  testified  as 
much  to  the  distrust  of  the  Moore  group  of  financiers  and  of  the 
soundness  of  the  property  which  they  control  as  it  did  to  the  general 
financial  uneasiness  of  the  time.  This  proposition  for  a  refunding 
mortgage  was  first  framed  in  July,  1903.  It  then  comprised  an  issue 
of  $250,000,000  4  per  cent  bonds,  to  be  used  for  the  refunding  of 
outstanding  obligations,  future  enlargements  and  construction, 
purchase  of  bonds  and  stocks  of  other  companies,  and  for  the  re- 
imbursing of  the  company  for  advances  already  made.  Subscrip- 
tions were  sought  in  New  York  in  vain.  Whereas  the  project  was 
to  have  come  up  at  a  meeting  of  the  stockholders  on  October  8,  the 
managers  obtained  an  adjournment  of  this  meeting  until  January 
without  action,  and  before  that  month  arrived  announced  an  in- 
definite postponement  of  operations.  On  March  21  the  stockholders 
voted  on  and  approved  a  modified  version  of  the  original  scheme, 


ROCK  ISLAXD  333 

whereby  $163,000,00x5  instead  of  $250,000,000  were  authorized,  of 
which  $15,000,000  were  to  be  issued  at  once,  and  $82,025,000  were 
to  be  reserved  for  retiring  certain  outstanding  obligations.  It  proved 
no  easier  to  secure  subscriptions  to  this  than  to  the  previous  plan, 
and  in  April  $5,000,000  4^  per  cent  notes  were  issued  instead  and 
taken  by  the  First  National  Bank  of  New  York,  which  was  already 
closely  identified  with  the  company.  Not  until  November,  1904, 
after  fourteen  and  one-half  months  of  persistent  effort,  was  a  firm 
of  bankers  found  to  take  the  refunding  issue.  $25,108,000  were 
then  sold  to  Speyer  &  Co.  Mr.  Speyer  became  a  director  of  the 
Rock  Island  and  entered  the  finance  committee,  while  the  proceeds 
of  the  sale  went  to  reimburse  the  treasury  for  capital  expended, 
and  to  provide  for  the  payment  of  obligations  maturing  in  1905. 
Since  this  time  other  blocks  of  the  bonds  have  been  sold. 

It  is  thus  evident  that  the  Rock  Island  has  not  regained  the  po- 
sition which  it  held  prior  to  the  operations  of  Mr.  Moore  and  of  his 
friends.  The  recent  developments  have  done  two  things :  they  have 
piled  upon  the  company  a  mass  of  exeessive-capitalization ;  and  they 
have  transformed  it  from  a  moderate  sized  railroad  with  a  clearly 
defined  flow  of  traffic  into  a  great  system  sprawled  over  the  Central 
\Yest  and  handling  at  least  three  different  currents  of  business. 
Neither  one  of  these  changes  alone  can  account  for  the  present  con- 
dition of  the  road.  Together  they  have  made  it  what  it  is.  It  is 
only  fair  to  say  that  large  sums  from  capital  account  are  being  spent 
upon  the  property  and  that  the  managers  announce  an  intention 
of  bringing  it  up  to  the  highest  standard  of  physical  condition.  Over 
$4,000,000  were  appropriated  for  additions  and  improvements  in 
1907,  and  nearly  $3,500,000  in  1906,  besides  still  greater  sums  for 
construction  and  equipment.  Heavier  rails  have  been  laid  down, 
bridges  have  been  strengthened,  equipment  increased  and  improved. 
Meanwhile  maintenance  charges  have  not  been  unduly  low,  though 
not  so  high  as  on  some  other  Western  roads.  It  is  true,  nevertheless, 
that  the  Rock  Island  has  lost  its  former  stability  and  must  await  a 
period  of  lessened  earnings  with  serious  apprehension. 


CHAPTER  X 
CONCLUSION 

Definition  of  railroad  reorganization  —  Causes  of  the  financial  difficulties  of  railroads 
—  Unrestricted  capitalization  and  unrestricted  competition  —  Problem  of  cash 
requirements  —  Problem  of  fixed  charges  —  Distribution  of  losses  —  Capitaliza- 
tion before  and  after  — Value  of  securities  before  and  after  —  Provision  for  future 
capital  requirements  —  Voting  trusts  —  Summary. 

A  GENERAL  surveyof  railroad  reorganizations  may  now  be  attempted. 
Eighteen  different  ones  and  no  less  than  forty-two  reorganization 
plans  have  been  examined  in  detail.  In  their  seemingly  infinite 
variety  may  not  some  guiding  principles  be  found  which  will  assist 
both  in  interpreting  the  past  and  in  directing  the  future  ?  * 

It  is  apparent  that  a  readjustment  of  a  railroad's  affairs  is  more 

Number  of  rear-        Name  of  reor- 

1  Date  ganizations  ganization  Number  of  plans    Foreclosures 

1900-4  i  Rock  Island  i  No 

1895-9  6  Atchison  2  Yes 

Baltimore  &  Ohio  i  No 

Erie  3  Yes 

Northern  Pacific  2  Yes 

Reading  4  Yes 

Union  Pacific  3  Yes 

1890—4  2  Atchison  i  No 

Richmond  Terminal  3  Yes 

1885-9  3  Atchison  i  No 

Reading  6  No 

East  Tennessee  2  Yes 

1880-4  3  Reading  5  No 

Rock  Island  i  No 

Union  Pacific  i  No 

1875-9  2  Erie  4  Yes 

Northern  Pacific  i  Yes 

1859  i  Erie  i  Yes 

18  42 

Carl  Snyder,  American  Railroads  as  Investments  (N.  Y.,  The  Moody  Corporation, 
1907),  offers,  inter  alia,  an  analysis  of  the  results  of  operation  of  the  railroads  con- 
sidered in  the  text. 


CONCLUSION  335 

difficult  than  the  readjustment  of  those  of  an  individual.  A  railroad 
is  a  complex  financial,  as  well  as  a  complex  operating  machine. 
Especially  when  it  has  been  built  up  by  the  union  of  numerous  small 
properties,  each  of  which  has  been  allowed  to  retain  a  certain  indi- 
viduality of  its  own,,  are  the  relations  between  the  different  parts  intri- 
cate and  involved.  The  obligations  which  have  been  incurred  in  the 
course  of  its  career,  and  the  kinds  of  paper  which  represent  these  ob- 
ligations, disclose  a  variety  which  the  debts  of  an  individual  seldom 
or  never  present.  This  complexity  in  railroad  capitalization  inevitably 
leads  to  clashes  in  interest  between  different  classes  of  security- 
holders.  Divergencies  in  interest  seem  to  appear  even  while  a  road  is 
solvent.  If  classes  of  securities  exist  upon  which  payment  of  interest 
is  optional,  it  is  to  the  advantage  of  the  junior  issues  to  prevent  pay- 
ment of  interest  or  dividends  upon  others  until  earnings  are  such  that 
payment  may  be  made  upon  all.  If  common  stockholders  can  rein- 
vest in  the  property  sums  which  normally  would  be  paid  in  dividends 
on  the  preferred  stock,  they  advance  the  day  upon  which  they  can 
secure  dividends  for  themselves  at  the  expense  of  their  seniors.  The 
same  situation  may  also  arise  as  between  the  preferred  stock  and  the 
income  bonds.  Or,  again,  it  may  be  to  the  advantage  of  speculative 
stockholders  to  pay  dividends  to  themselves  by  means  of  the  accumu- 
lation of  a  floating  debt,  and  to  sell  out  at  top  quotations,  leaving  the 
floating  debt  to  take  precedence  even  of  mortgage  bonds.1  Both  this 
and  the  preceding  operation  are  facilitated  by  the  control  which  the 
least  valuable  portion  of  the  capital,  the  common  stock,  usually  has 
over  the  policy  of  the  entire  company.  But  it  is  when  a  reorganiza- 
tion becomes  necessary  that  these  conflicts  in  interest  become  most 
apparent,  and  it  is  as  a  compromise  between  contending  forces  that 
a  reorganization  plan  must  take  its  shape. 

The  term  "reorganization"  is  used  in  this  study  to  denote  the 
exchange  of  new  securities  for  the  principal  of  outstanding,  unma- 
tured,  general  mortgage  bonds,  or  for  at  least  50  per  cent  of  the 
unmatured  junior  mortgages  of  any  company,  or  for  the  whole  of  the 
capital  stock.  These  exchanges  have  been  the  essential  features  of 

1  The  lien  of  a  floating  debt  is  inferior  to  that  of  a  bond  when  unsecured,  except 
as  it  represents  arrears  of  wages  and  payment  for  supplies.  But  it  is  usually  very 
well  secured. 


336  RAILROAD  REORGANIZATION 

the  operations  which  have  been  described.  This  exchange  of  secur- 
ities must  take  place  upon  a  considerable  scale.  Small  readjust- 
ments may  involve  valuations  of  specific  bits  of  property,  but  they  do 
not  require  that  comprehensive  survey  of  the  relations  of  all  parts  of 
the  system  to  each  other  which  distinguishes  the  general  reorganiza- 
tion. In  fact,  the  small  adjustments  are  at  once  more  simple  and  more 
difficult  than  the  larger  kind.  More  simple  because  they  involve  less 
change;  more  difficult  because  the  same  pressure  cannot  often  be 
brought  to  bear.  It  is  useful  to  mark  a  dividing-line  between  the 
small  and  the  large.  No  such  line  can  be  defended  as  exact ;  but  the 
one  chosen  seems  to  include  a  tolerably  homogeneous  group,  and  will 
lend  a  convenient  defmiteness  to  the  discussion. 

As  thus  defined,  a  reorganization  may  be,  and  generally  is,  accom- 
panied by  other  operations  essential  to  its  success.  If  a  large  floating 
debt  has  been  accumulated,  provision  for  the  cancellation  of  this  debt 
must  be  made ;  *  if  unprofitable  leases  have  been  entered  into,  these 
must  be  abolished ;  2  or  if  the  system  has  been  unduly  hampered  by 
inability  to  issue  new  capital,  appropriate  relief  must  be  afforded. 
But  none  of  these  are  determining  features.  They  are  means  to  an 
end,  as  is  the  exchange  of  new  securities  for  old,  and  they  may  have 
their  effect  just  as  the  economical  management  of  the  Union  Pacific 
under  Charles  Francis  Adams  had  its  effect  in  the  years  prior  to 
1890;  but  they  are  not  essential  parts  of  that  group  of  operations 
which  have  been  characterized  as  reorganizations. 

The  exchange  of  new  securities  for  old  on  a  large  scale  usually 
takes  place  when  a  railroad  is  unable  to  meet  maturing  obligations. 

1  In  the  case  of  the  Rock  Island  in  1902  there  was  no  floating  debt  to  be  con- 
sidered, while  in  1885  the  Erie  funded  overdue  coupons  and  issued  a  6  per  cent 
mortgage  on  its  Jersey  City  terminals  to  cover  accumulated  liabilities,  but  did  not 
disturb   its  outstanding  mortgage    bonds,  and  cannot,  therefore,  be  said  to  have 
reorganized. 

2  This  was,  in  fact,  a  prominent  feature  of  the  reorganizations  between  1893  and 
1898.'  The  Atchison  surrendered  the  St.  Louis  &  San  Francisco;  the  Erie  absorbed 
the  New  York,  Pennsylvania  &  Ohio  into  its  system  instead  of  continuing  the  lease 
thereof;  the  Northern  Pacific  surrendered  the  lease  of  the  Wisconsin  Central  and 
cancelled  various  unprofitable  traffic  contracts  and  traffic  agreements;  the  Reading 
gave  up  the  Lehigh  Valley  and  its  New  England  extensions;  the  Southern  reduced 
its  mileage  by  over  one-half;  and  the  Union  Pacific  shrunk  from  7674  miles  in  1892 
to  5399  in  1899. 


CONCLUSION  337 

Of  1 8  reorganizations  and  42  plans,  15  reorganizations  and  39  plans 
have  had  to  do  with  the  extrication  of  companies  from  financial 
embarrassment.  But  though  impending  insolvency  is  the  usual  occa- 
sion it  is  not  the  only  one.  Reorganization  sometimes  occurs  when 
prosperity  is  too  great  as  well  as  when  it  is  too  little.  Or  a  manage- 
ment may  desire  to  get  rid  of  hampering  restrictions,  or  it  may  desire 
to  manipulate  the  conditions  of  control.  This  last  named  cause  — 
the  desire  to  manipulate  conditions  of  control  —  has  been  fortunately 
an  infrequent  cause  of  reorganization.  An  example  is,  however, 
afforded  by  the  Rock  Island  reorganization  of  1902.  It  will  be 
remembered  that  the  Chicago,  Rock  Island  &  Pacific  Railway  had 
long  been  a  prosperous  road  in  the  Middle  West,  and  that  its  control 
had  required  the  ownership  of  between  40  and  50  per  cent  of 
$75,000,000  of  common  stock,  quoted  at  over  160  in  the  early  part  of 
1902.  By  the  issue  of  new  bonds,  new  preferred  and  new  common 
stock  to  a  total  of  $270  for  every  $100  of  old  common  stock,  and  by 
giving  to  the  preferred  stockholders  the  right  to  elect  a  majority  of 
the  directors,  the  owners  of  the  property  were  able  to  part  with  a 
large  portion  of  their  holdings  and  yet  jetain  absolute  control.  A 
somewhat  similar  case  was  that  of  the  Chicago  &  Alton.  This  road 
had  been  a  conservatively  capitalized  enterprise,  doing  a  large  busi- 
ness between  Chicago,  St.  Louis,  and  Kansas  City.  It  had  paid  7  per 
cent  or  better  on  its  two  classes  of  stock  for  eighteen  years  without  a 
break,  and  had  accumulated  in  that  time  an  uncapitalized  construc- 
tion expenditure  of  $12,444,178.  In  1899  a  syndicate  of  Eastern 
capitalists  bought  control,  and  the  following  year  reorganized  the 
property  by  forming  a  holding  company,  which  issued  $22,000,000 
in  3J  per  cent  bonds,  $19,489,000  in  preferred  and  $19,542,800  in 
common  stock  to  exchange  for  the  $22,230,600  old  common  and 
preferred  shares  outstanding.  At  current  prices  on  January  3,  1899, 
a  majority  of  both  the  old  issues  would  have  cost  $i  9,030,048 ;  on 
January  4,  1901,  however,  a  majority  of  both  of  the  new  issues 
represented  an  investment  of  $10,729,437;  and  this  investment  it 
would  have  been  possible  to  reduce  to  $2,241,377  by  the  sale  of  the 
new  bonds  received,  without  in  any  way  endangering  control.1 

1  See  Interstate  Commerce  Commission:  In  the  Matter  of   Consolidations  and 
Combinations  of  Carriers,  etc.,  12  I.  C.  C.  Rep.  319. 


338  RAILROAD  REORGANIZATION 

It  is  evident  that  both  the  Rock  Island  and  the  Chicago  &  Alton 
reorganizations  were  influenced  by  the  very  great  prosperity  of  the 
companies  concerned.  It  was  desired  to  reap  a  profit  by  the  sale  of 
new  securities  as  well  as  to  lessen  the  investment  required  for  control ; 
although  it  may  be  remarked  that  the  advantage  of  retaining  control 
depended  on  the  future  prosperity  of  the  roads.  Reorganizations  con- 
cerned with  manipulation  of  control  are  therefore  closely  allied  with 
reorganizations  due  to  too  great  prosperity.  These  latter  may,  how- 
ever, take  place  independently,  and  are  likely  to  occur  whenever 
profits  are  extraordinarily  large,  and  a  simple  stock  dividend  is 
deemed  inadvisable.  An  example  was  the  reorganization  of  the  Chi- 
cago, Rock  Island  &  Pacific  in  1880,  when  the  formation  of  a  new 
company  and  the  exchange  of  new  stock  for  old  was  deemed  wise,  in 
view  of  the  large  earnings  which  were  to  be  distributed. 

The  desire  to  eliminate  hampering  restrictions  is  seldom  the  sole 
cause  for  a  reorganization,  but  frequently  it  is  a  contributing  one. 
When,  for  instance,  the  managers  of  the  Union  Pacific  wished  to 
extend  their  system  in  the  years  following  1880,  they  were  forced  to 
establish  a  separate  organization  for  each  branch  line.  By  the  terms 
of  the  charter  nothing  could  be  consolidated  with  the  main  stem 
except  the  Kansas  Pacific  and  the  Denver  Pacific,  the  consolidation 
with  which  was  provided  for  in  the  original  acts.1  This  obviously 
prevented  considerable  economies,  and  could  be  remedied  only  by  a 
new  incorporation.  The  Northern  Pacific  was  hampered  in  yet  an- 
other way  because  the  consent  of  three-fourths  of  the  preferred  stock 
was  required  by  the  terms  of  the  reorganization  of  1875  to  the  imposi- 
tion of  new  mortgages;2  and  similarly  the  Atchison,  after  1889, 
found  it  extremely  difficult  to  issue  new  bonds  because  of  the  posi- 
tion of  the  outstanding  income  bonds.  In  this  last  case  the  restriction 
was  the  sole  cause  of  the  reorganization  which  followed.  It  should  be 
remarked  that  the  cancellation  of  such  provisions  sometimes  works 

1  Testimony  of  C.  F.  Adams,  United  States  Pacific  Railway  Commission  Report, 
1887,  vol.  i,  p.  45. 

2  "  It  is  only  by  the  fullest  knowledge  of  the  affairs  of  the  company  that  a  correct 
judgment  of  the  best  manner  of  meeting  its  wants  can   be  formed,  and  there  is  ao 
other  practicable  way  to  manage  the  business  of  the  company  to  its  best  advantage 
than  for  the  stockholders  to  elect  directors  worthy  of   confidence,  and  to  leave  the 
management  to  them."    Annual  Report,  1887,  Robert  Harris,  President. 


CONCLUSION  339 

considerable  injustice.  Restrictions  on  future  increases  in  capital, 
for  instance,  may  have  facilitated  the  issue  of  bonds  in  the  past,  and 
in  this  case  have  formed  part  of  the  consideration  given  for  subscrip- 
tions. The  readjustment  is  defended  on  the  ground  of  the  need  of 
the  corporation,  or  is  so  accomplished  as  not  to  lessen  the  value 
of  the  creditors'  holdings.1 

The  typical  railroad  reorganization,  as  has  been  said,  occurs  when 
a  road  ceases  to  be  able  to  pay  interest  on  its  outstanding  obliga- 
tions. Whether  because  of  excessive  capitalization,  or  because  of 
unexpectedly  low  earnings,  or  owing  to  an  accumulation  of  floating 
debt  which  ties  up  all  current  resources,  the  .reorganizingjajlrQad 
fin^itsejMncapable  of  meeting  payments^  falling^due.  For  this, 
experience  shows  that  two  deep-seated  causes  have  generally  been 
responsible.  First,  there  is  the  almost  entire  freedom  in  matters  of 
capitalization  which  railroads  have  enjoyed.  Far  from  the  recom- 
mendation of  Secretary  Taft  that  no  railroad  company  engaged  in 
interstate  commerce  be  permitted  to  issue  stock  or  bonds  and  put 
them  on  sale  in  the  market  except  after  a  certificate  by  the  Interstate 
Commerce  Commission  that  the  securities  are  issued  with  the  ap- 
^proval  of  the  Commission  for  a  legitimate  railroad  purpose,2  Ameri- 
can railroads  have  in  the  past  been  practically  unrestricted.  It  was 
open  to  the  Erie  to  increase  its  capitalization  per  mile  from  $81,068 
in  1864  to  $117,760  in  1872,  with  no  corresponding  addition  to  its 
property ;  it  was  open  to  the  Union  Pacific  to  create  a  capitalization 
of  $104,561  per  mile  by  1870,  of  which  about  one-quarter  was  in 
the  form  of  government  bonds ;  and  it  was  possible  for  the  Atchison 
to  issue  $129,162,350  in  new  bonds  and  stocks  between  1884  and 
1889  while  its  net  earnings  seriously  decreased.  Had  there  been  a 
supervision  of  new  issues,  or  had  even  a  certain  percentage  of  stocks 
to  bonds  in  those  instances  been  required,  failures  would  have  been 
less  frequent  and  reorganizations  less  common.  New  construction 
would  probably  have  been  less  rapid,  but  not  so  much  so  as  is  often 
asserted.  A  smaller  number  of  new  enterprises  might  have  yielded 

1  In  the  case  of  the  Atchison,  old  income  bonds  were  retired  by  new  second  mort- 
gage bonds,  with  the  result  that  the  aggregate  value  of  creditors'  holdings  was  largely 


increased. 

2  Speech  at  Columbus,  Ohio,  August  19,  1907. 


340  RAILROAD  REORGANIZATION 

larger  profits ;  the  chances  for  land  speculation  might  have  tempted 
many,  and  liberal  regulations  might  have  allowed  a  generous  profit 
while  at  the  same  time  eliminating  all  inflation  due  to  fraud.  Un- 
fortunately railroad-hungry  communities  seldom  stopped  to  count 
the  cost.  West,  South,  North,  and  East,  privileges  were  offered  to 
railroads,  donations  of  land  and  money  were  made,  and  exemptions 
from  taxation  were  conferred. 

The  second  fundamental  cause  of  railroad  distress  has  been 
competition.  If  unrestricted  capitalization  has  increased  the  load 
whicTTthe  railroads  have  had  to  bear,  unrestricted  competition  has 
impaired  their  ability  to  support  any  load  at  all.  The  forms  which 
this  competition  has  taken  have  been  mainly  two :  first,  the  cutting  of 
rates,  either  openly  or  by  secret  concessions;  second,  reckless  ex- 
tensions of  line,  generally  followed  by  rate-cutting.  The  cutting  of 
\/railroad  rates  is  now  a  subject  familiar  to  all.  Illustrations  may  be 
found  in  the  history  of  any  great  railroad  system.  President  Had- 
ley  has  made  classical  the  theory  that  roads  will  take  business  until 
rates  fall  below  the  specific  cost  of  hauling  a  given  shipment ;  that 
is,  below  the  additional  cost  which  the  articles  in  question  impose. 
Even  this  limitation  is  often  non-existent.  Railroads  which  serve 
different  cities  will  take  freight  when  a  war  is  in  progress  whether 
or  not  the  rate  repays  the  specific  cost  of  hauling.  If  their  rival  imi- 
tates them  they  hope  to  wear  it  out  by  their  superior  ability  to 
stand  the  loss.  If  it  does  not,  the  city  which  they  serve  will  tempo- 
rarily eject  all  others  from  common  market,  and  may  obtain  so  firm 
a  footing  that  a  permanent  increase  in  business  will  result.  All  of 
the  railroads  which  have  been  studied,  in  fact,  have  suffered  more 
or  less  from  rate-cutting.  Repeated  attempts  at  pooling  and  agree- 
ments to  maintain  rates  have  improved  conditions  only  during  the 
short  periods  in  which  the  agreements  have  been  of  effect.  In  the 
South  there  have  been  scarcely  more  successful  attempts  to  secure 
harmony  by  community  of  stock  control.  Competition  by  means 
of  extensions  has  been  also  vigorously  practised.  The  reader  will 
recall  the  growth  of  the  Atchison  from  1884  to  1889.  It  was  after 
the  dissolution  of  the  Southern  Railway  Security  Company  that 
the  East  Tennessee  entered  upon  its  policy  of  purchase  and  of  new 
construction.  The  entrance  of  the  Reading  into  New  England  was 


CONCLUSION  341 

the  direct  cause  of  its  failure  in  1893 ;  and  that  of  the  Baltimore  & 
Ohio  into  New  York  largely  contributed  to  its  difficulties  in  1887. 
Sometimes  such  extension  is  into  territory  where  there  is  no  business 
to  justify  it.  Sometimes  the  business  is  there,  but  has  to  be  divided 
among  too  many  rivals.  Sometimes  the  new  lines  are  so  poorly  built 
as  to  be  unduly  expensive  to  work,  and  not  infrequently  they  are  so 
good  that  the  resources  of  the  expanding  road  are  strained  in  ac- 
quiring them.  In  any  one  of  these  four  cases  new  extension  causes 
a  drain  upon  the  parent  road  which  may  readily  bring  about  its 
failure. 

Other  conditions  may  lead  to  railroad  failure.  Simon  Sterne 
alleges  the  following  causes  to  be  often  responsible :  * 

1.  The  control  of  railroads  by  stock  which  represents  little  or  no 
original  cash  investment. 

2.  The  development  of  the  territory  served  by  individual  rail- 
roads at  a  slower  rate  than  is  anticipated,  and  the  influence  of  com- 
petition in  reducing  profits  when  the  territory  has  developed. 

3.  The  undertaking  of  railway  construction  when  there  is  con- 
siderable activity  in  the  money  market,  and  when  capital  commands 
a  high  rate  of  interest. 

4.  The  circumstance  that  railways,  lacking  reserve  capital,  can 
never  avail  themselves  of  a  cheap  market  for  labor  or  supplies,  but 
must  always  buy  when  everything  is  inflated,  because  then  only  can 
they  float  their  loans  and  borrow  capital. 

5.  The  necessity  of  complete  reconstruction  within  a  brief  period 
of  most  railroads  built  through  new  territory,  and  the  increase  in 
funded  and  in  floating  debt  involved. 

7.  The  growth  of  railroads  beyond  the  ability  to  handle  them. 

8.  The  steadily  increasing  expenditures  required  by  law  to  ac- 
commodate the  public. 

9.  The  abuse  of  their  position  by  directors  and  trustees. 

10.  The  irresponsibility  of  railway  accounts. 

And  it  may  be  added  that  the  control  of  American  railways  by 
foreign  investors  who  apportion  charges  between  operating  and 
capital  accounts  in  a  way  unsuited  to  American  conditions  has  been 
upon  occasion  a  cause  of  disaster.  Unlimited  freedom  in  matters 

1  Forum,  September,  1890,  and  March,  1894. 


342  RAILROAD  REORGANIZATION 

of  capitalization  and  unrestricted  competition  have  nevertheless 
been  the  fundamental  causes  of  bankruptcy. 

It  is  interesting  to  observe  that  the  majority  of  the  principal  rail- 
roads which  failed  in  the  nineties  had  taxed  their  resources  nearly 
to  the  point  of  exhaustion  before  the  panic  of  1893  finally  drove 
them  to  the  wall.  For  every  $100  received  in  1892  the  Richmond 
&  Danville  and  East  Tennessee  systems  were  paying  out  $68.79  for 
operating  expenses  and  $31.15  for  interest  on  bonds,  rentals,  etc., 
leaving  only  6  cents  for  dividends,  necessary  improvements,  and  the 
like.  For  every  $100  received  the  Erie  paid  out  the  same  year 
$66.46  for  operating  expenses  and  $31.85  for  interest  and  other  fixed 
charges,  leaving  only  $1.68  as  a  surplus  to  ensure  solvency  in  case 
of  a  decline  in  earnings.  In  1893  the  Atchison,  the  Northern  Pacific, 
the  Reading,  and  the  Union  Pacific  had  no  surplus  at  all,  but  rather 
a  deficit.  The  following  table  shows  similar  figures  for  all  of  our 
reorganized  roads: 

Percentage  to  Gross  Income 

1893  1892 

Operating    Fixed  Operating    Fixed 

Expenses  Charges  Surplus   Expenses    Charges   Surplus 

B.  &  O.  66.89  24-27  8-83        67-68  24.55  7-76 

Erie  64.91  32.12  2.96        66.46  31.85  1.68 

N.  Pac.  59.25  43-55  53- 7*  36-34  9-94 

Reading  57.04  45-41  52.64  33-91  I3-44 

Rich.  &  Danv.  and  73.49  25.63  .12        68.79  3I-I5 

E.  Tenn. 

U.  Pac.  59.66  43.18  51.91  36.42  11.66 

Atchison  77-47  24.96  77-i6  21.59  I.241 

With  these  figures  may  be  compared  statistics  for  seven  roads 
which  went  through  the  depression  of  1893-7  without  failure. 
These  roads  had  a  more  extensive  margin  which  could  be  cut  off 
before  interest  on  their  bonds  should  be  endangered.  Furthermore, 
this  margin  was  secured,  not  by  low  operating  expenses,  but  by  low 
fixed  charges,  including  interest  on  bonds.  Operating  expenses 
averaged  higher  than  for  the  preceding  group,  fixed  charges  averaged 

1  The  percentages  for  the  Atchison  are  corrected  according  to  the  report  of  Mr. 
Little.  Owing  to  the  lack  of  available  detail  it  has  been  necessary  to  increase  operating 
expenses  by  the  total  amount  of  the  errors  which  he  discovered,  and  this  figure  is, 
therefore,  unduly  inflated. 


CONCLUSION  343 

much  lower.  In  the  first  group  but  one  road  had  charges  hi  1893 
which  were  less  than  25  per  cent  of  gross  income;  in  the  second 
group  but  two  roads  had  charges  which  were  greater.  The  condi- 
tion of  the  roads  of  the  second  group  referred  to  was  as  follows : 

Percentage  to  Gross  Income 


i893 

1892 

Operating 

Fixed 

Operating 

Fixed 

Expenses 

Charges 

Surplus 

Expenses 

Charges 

Surplus 

c. 

B. 

& 

Q- 

64.46 

23.12 

12.41 

65-17 

20.86 

13.96 

c, 

M. 

& 

St.  P. 

65.95 

20.78 

13.26 

64.00 

22.36 

13-63 

c, 

R. 

I. 

&p. 

71.72 

I3.3I 

14.96 

69.88 

19.83 

10.28 

Great 

No. 

5°-44 

34-54 

15.01 

52.66 

32-98 

14-34 

111. 

Cen. 

61.92 

25-84 

12.23 

64.58 

23-99 

II.  12 

N. 

Y, 

N. 

H.&H. 

72.31 

16.07 

16.36 

73.36 

8.77 

17.86 

N. 

Y. 

C. 

68.79 

20.84 

10.36 

68.46 

21-53 

9.96 

The  causes  which  lead  to  railroad  failure  have  now  been  men- 
tioned. When  bankruptcy  has  at  last  occurred,  three  groups  of 
interests  take  part  in  the  reorganization  which  must  ensue.  These 
are  the  creditors,  who  find  interest  and  perhaps  principal  of  their 
bonds  in  default ;  the  stockholders ;  and  the  bankers  and  financiers 
who  advance  ready  money  and  subscribe  to  necessary  guarantees. 
.Of  these  the  creditors  and  the  stockholders  are  widely  scattered, 
and  are  quite  unable  to  protect  themselves  by  individual  action. 
Their  first  impulse  is,  therefore,  either  to  elect  committees  to  repre- 
sent them,  or  to  authorize  self-appointed  committees  of  well-known 
men  to  look  after  their  interests.  Stockholders  in  a  reorganization 
have  little  voice.  They  are  the  owners,  and  all  that  the  corporation 
has  is  subject  first  to  the  bondholders  from  whom  it  has  borrowed 
money.  Occasionally  they  seem  to  make  their  influence  felt.  In 
1880  the  Reading  actually  attempted  to  pay  off  its  floating  debt  by 
bonds  with  a  lien  inferior  to  the  common  stock;  and  in  1892  the 
Olcott  plan  for  the  reorganization  of  the  Richmond  Terminal  Com- 
pany strongly  favored  the  junior  securities.  But  as  a  rule  stock- 
holders must  accept,  and  rightly,  about  what  the  creditors  desire. 

The  creditors,  then,  are  the  most  important  factors,  and  they,  like 
the  stockholders,  act  through  committees.  There  may  be  a  com- 
mittee for  every  class  of  bonds,  or  one  or  more  classes  may  join  to- 
gether. The  Union  Pacific,  in  1893,  had  committees  for  the  consoli- 


344  RAILROAD  REORGANIZATION 

dated  first  mortgage,  the  collateral  trust  53,  the  Oregon  Railway  & 
Navigation  consols,  the  Dutch  bondholders,  and  certain  branch 
lines;  and  in  1894  for  the  collateral  trust  4^8  and  the  Kansas  Pacific 
consols.  As  the  financial  situation  grew  worse  the  interest  on  senior 
mortgages  became  imperilled,  and  even  the  Union  Pacific  first 
mortgage  bondholders  deemed  it  wise  to  elect  a  committee ;  while  a 
second  committee  arose  for  the  Kansas  Pacific  consols,  and  a  new 
committee  for  the  Denver  Extension  mortgage.  By  April,  1895,  at 
least  fifteen  committees  were  in  active  operation,  of  which  fourteen 
represented  not  more  than  two  classes  of  bonds  each.  The  Reading 
reorganization  of  1884  to  1886  was  largely  shaped  by  two  commit- 
tees representing  the  general  mortgage  bondholders ;  seven  reorgan- 
ization trustees  representing  the  foreign  creditors,  the  general,  in- 
come, junior  securities,  and  stockholders ;  and  an  opposition  commit- 
tee known  as  the  Lockwood  Committee.  Within  four  months  after 
the  failure  of  the  Erie  in  1875  the  English  bondholders  and  stock- 
holders each  had  elected  a  committee,  and  had  urged  all  security- 
holders  to  join;  a  meeting  of  bondholders  had  elected  Mr.  John 
Hooper  chairman  of  a  committee  in  New  York ;  and  another  meeting 
had  elected  Mr.  N.  B.  Lord  chairman  of  another  committee  in  that 
city.1  The  more  general  a  committee  the  greater  the  influence  which 
it  seems  able  to  exert  on  reorganization,  and  the  greater  the  likeli- 
hood that  the  plan  which  it  approves  may  be  accepted.  The  fact 
that  a  scheme  has  to  meet  the  criticism  of  opposing  interests  during 
its  formation  renders  it  less  likely  to  contain  any  injustice  which 
conditions  make  it  possible  to  avoid ;  and  the  endorsement  of  their 
representatives  makes  all  classes  of  bondholders  more  ready  to  ac- 
cord it  temperate  consideration.  Among  the  numerous  Union  Pacific 
committees  it  was  the  joint  committee,  representing  the  foreign 
holders,  the  Denver  &  Rio  Grande,  the  Oregon  Railway  &  Navi- 

1  In  1893,  after  the  Northern  Pacific  failure,  the  consolidated  5  per  cent  bond 
holders  formed  a  committee ;  Mr.  Brayton  Ives  invited  bondholders  to  send  in  their 
names  and  addresses  to  him  (1894);  and  later  in  1894  the  falling  off  in  the  rail- 
road's  earnings  induced  the  formation  of  the  Livingston  and  Van  Nostrand  com- 
mittees, and  the  announcement  of  the  consolidated  committee  that  it  would  accept 
the  deposit  of  second  and  third  mortgage  bonds.  Finally,  within  four  months  after  the 
Atchison  failure  of  1893,  four  important  reorganization  committees  were  asking  for 
deposits  in  the  United  States  and  one  was  soliciting  deposits  in  London. 


CONCLUSION  345 

gation,  and  other  interests  that  took  the  leading  part.  In  the  case 
of  the  Reading  from  1884  to  1886  the  seven  reorganization  trustees 
outweighed  any  other  representatives  of  the  creditors ;  in  that  of  the 
Northern  Pacific  the  Adams  Committee  succeeded  in  becoming  a 
general  reorganization  committee,  and  took  the  leading  part;  and 
the  Atchison  reorganization  was  accomplished  only  by  the  union 
into  a  joint  executive  reorganization  committee  of  three  of  the  pre- 
viously existing  bodies.1 

The  situation  which  bankers  and  financiers  occupy  in  relation 
to  a  bankrupt  road  is  almost  equally  important.  Their  aid  is  essen- 
tial to  a  reorganization  while  that  of  the  officers  and  receivers  of 
the  company  is  not.  And  they  are  not  subject  to  the  pressure  of  im- 
minent financial  loss  which  forces  creditors  and  stockholders  to  ac- 
cept plans  of  which  they  do  not  altogether  approve.  It  is  true  that 
these  bankers  may  have  money  invested  in  the  securities  of  the  road. 
It  may  even  happen  that  they  have  been  formerly  in  control.  In 
this  case  a  certain  pressure  does  exist.  But  as  bankers  their  function 
is  to  do  one  or  both  of  two  things ;  namely,  to  advance  cash  to  keep 
the  railroad  system  together  pending  reorganization,  and  to  under- 
write assessments  or  the  sale  of  securities.  Either  one  of  these  in- 
volves them  in  new  risks,  and  in  undertaking  either  they  will  be  only 
indirectly  affected  by  investments  which  they  may  previously  have 

1  The  officers  of  bankrupt  roads  have  no  need  of  committees  to  make  their  wishes 
known,  but  only  so  far  as  they  are  bondholders,  or  in  so  far  as  they  can  influence 
bondholders  by  argument  do  their  opinions  carry  weight.  President  Ives  of  the  North- 
ern Pacific  in  1893  was  able  to  use  his  position  to  fight  his  opponents  through  the 
courts,  and  secured  besides  appointment  on  a  stockholders'  protective  committee,  but 
exercised  no  great  influence  on  the  reorganization;  President  Jewett,  of  the  Erie, 
gained  the  confidence  of  the  visiting  committee  of  English  bondholders  in  1875,  and 
had  some  voice  accorded  him ;  but  generally  speaking  officers  have  to  rest  content  if 
they  can  successfully  defend  themselves  against  charges  of  inefficiency  and  misman- 
agement. They  are,  in  fact,  both  the  choice  and  the  representatives  of  the  stock- 
holders, and  the  stockholders  having  no  authority  in  the  event  of  bankruptcy  can 
delegate  none.  Officers  of  the  courts  which  are  in  control  of  bankrupt  railroads  enjoy 
sometimes  a  different  position  from  officers  of  the  corporations  themselves,  in  that 
they  do  not  represent  or  depend  on  stockholders,  and  may  not  be  connected  with  the 
circumstances  which  have  caused  the  ruin  of  the  road.  Thus  the  receivers  of  the 
Union  Pacific  in  the  nineties  were  called  to  testify  before  Congressional  committees, 
and  those  of  the  Erie  chose  a  committee  which  prepared  the  first  reorganization  plan 
suggested,  but  in  both  cases  the  functions  of  the  court  officers  were  purely  advisory, 
and  so  they  must  always  be. 


346  RAILROAD  REORGANIZATION 

made.  Their  influence  on  reorganization  is  strong  because  they  are 
necessary,  and  because  they  are  free  to  participate  or  not  to  parti- 
cipate according  to  their  opinion  of  the  precise  reorganization  plan 
proposed.  For  much  the  same  reason  their  influence  is  a  wholesome 
one.  We  shall  see  that  the  primary  conflict  which  takes  place  in  any 
reorganization  is  between  the  interests  of  the  corporation  which 
needs  a  lessening  of  its  burdens,  and  the  interests  of  the  security- 
holders  which  is  opposed  to  any  reduction  in  their  claims.1  The 
degree  to  which  the  former  interest  prevails  determines  the  strength 
of  the  reorganized  company.  In  this  conflict  the  bankers  naturally 
take  the  side  of  the  company.  As  bankers,  who  advance  cash,  and 
who  usually  receive  their  pay  in  securities,  they  wish  to  make  the 
corporation  prosperous,  and  to  raise  the  quotations  of  its  securities 
\to  a  high  figure.  An  important  factor  also  is  that  as  reputable 
•banking  firms  they  wish  the  future  career  of  corporations  which 
they  have  handled  to  reflect  credit  upon  themselves. 

An  example  of  the  influence  of  bankers  and  financiers  appears  in 

1  In  1895  the  final  Atchison  reorganization  plan  announced  the  following  arrange- 
ment: "A  contract  has  been  made  with  a  syndicate  to  furnish  an  amount  of  money 
equal  to  the  assessments  of  non-assenting  or  defaulting  stockholders,  and  such  syn- 
dicate, by  such  payment,  shall  take  the  place  of  the  non-assenting  or  defaulting 
stockholders,  and  shall  be  entitled  to  receive  the  new  common  and  preferred  stock, 
which  non-assenting  or  defaulting  stockholders  would  have  been  entitled  to  receive 
if  they  had  deposited  their  stock  and  paid  their  assessment  in  full.  Syndicates  may 
also  be  formed  to  furnish  the  money  needed,  in  case  of  foreclosure,  to  pay  the  non- 
assenting  bondholders  their  pro  rata  share  of  the  proceeds  of  sale,  and  to  advance  any 
cash  which  may  be  required  during  the  reorganization  and  for  other  purposes." 
Chron.  60:  658-62,  1895.  The  reorganization  plan  of  the  Baltimore  &  Ohio  in 
1898  contained  the  following:  "A  syndicate  has  been  formed  .  .  .  which  agrees: 
ist,  To  purchase  $6,975,000  of  the  new  preferred  stock,  and  $30,250,000  of  the  new 
common  stock,  and  to  offer  the  same  for  sale  to  depositing  holders  of  old  ist  and  2d 
preferred  and  common  stock  of  the  Baltimore  &  Ohio  Railroad  Company.  .  .  .  2d, 
To  purchase  $9,000,000  3^  per  cent  prior  lien  bonds;  $12,450,000  ist  mortgage  4  per 
cent  bonds;  $16,450,000  preferred  stock.  3d,  To  protect  the  new  company  in  the 
ownership  and  possession  of  the  properties  covered  by  $49,974,098  ...  of  the  exist- 
ing mortgage  bonds  of  the  old  company  of  different  issues  by  agreeing  to  purchase 
from  the  new  company  the  new  securities  not  taken,  but  to  which  the  holders  of  such 
bonds  would  have  been  entitled  if  depositing  under  the  plan,  at  a  price  equal  to  the 
principal  of  the  respective  old  securities,  and  also  to  make  advances  and  perform 
other  obligations  essential  for  the  purposes  of  the  plan."  Poor's  Manual,  1898,  p. 
1381.  Similar  provisions  appear  in  the  plans  of  the  Erie,  the  Northern  Pacific,  the 
Reading,  the  Southern,  and  the  Union  Pacific. 


CONCLUSION  347 

the  case  of  the  Union  Pacific.  A  committee  comprising  General 
Louis  Fitzgerald,  Jacob  Schiff,  T.  J.  Coolidge,  Oliver  Ames,  and 
two  railway  presidents  took  the  road  out  of  receivers'  hands,  cut 
charges  per  mile  by  over  one-half,  and  paid  the  Government's  claim 
in  full.  The  Reading  reorganization  of  1886  to  1887  was  the  work 
of  a  syndicate  which  took  hold  after  interests  closely  connected  with 
the  properties  had  failed  to  produce  a  satisfactory  plan.  The  result 
was  the  best  plan  ever  applied  to  the  Reading  Railroad.  The  Rich- 
mond Terminal  Company  was  reorganized  by  a  single  banking  firm. 
In  this  case  the  operation  cut  charges  less  than  could  have  been 
desired,  though  the  other  parts  of  the  plan  were  well-advised.  The 
intervention  of  a  syndicate  has  fortunately  been  usual  of  late  years. 
And  it  is  doubtful  if  the  compensation  accorded  has  been  exorbitant, 
even  for  the  direct  services  rendered.  In  1886  the  Reading  agreed 
to  pay  a  syndicate  5  per  cent  upon  $15,000,000  of  subscribed  capital, 
plus  6  per  cent  on  all  money  advanced.  The  Richmond  Terminal 
paid  Drexel,  Morgan  &  Co.  $100,000  in  cash  to  cover  their  office 
expenses  and  $750,000  in  common  stock  at  $15  per  share  l  for  their 
work  of  cooperation  and  supervision.  The  Union  Pacific  paid  the 
syndicate  which  financed  its  reorganization  $5,000,000  in  preferred 
stock  quoted  at  59,  or  19  per  cent  at  current  prices  on  a  subscribed 
capital  of  $15,000,000.  All  three  syndicates,  however,  ran  the  risk 
of  depreciation  in  the  value  of  the  stock  given  them,  and  all  three 
rendered  great  service  in  providing  large  sums  of  cash  at  a  time 
when  capital  was  not  readily  to  be  obtained. 

Payments  to  bankers  or  trust  companies  receiving  deposits  of 
bonds  and  stocks  and  undertaking  the  clerical  work  of  a  reorgan- 
ization, should  be  sharply  distinguished  from  those  made  to  under- 
writing syndicates  above  described.  Depositaries  assume  no  risk, 
and  are  paid  a  definite  sum  for  definite  services  performed.  In 
1895  the  Erie  set  the  compensation  of  Messrs.  J.  P.  Morgan  &  Co. 
and  J.  S.  Morgan  &  Co.,  for  their  services  as  depositaries  and  in 
carrying  out  the  plan  of  reorganization,  at  $500,000  in  addition  to 
all  expenses  incurred ;  and  the  same  year  the  Union  Pacific  allowed 
$1,000,000  in  preferred  stock  to  the  bankers  who  managed  its  un- 
derwriting syndicate,  as  against  $5,000,000  to  the  syndicate  itself. 

1  In  1894. 


348  RAILROAD  REORGANIZATION 

It  should  be  said  that  the  compensation  to  depositaries  is  in  part 
payment  for  the  use  of  the  name  of  the  firms  employed  as  well  as 
in  part  payment  for  clerical  work  performed.  Bondholders  are  more 
ready  to  deposit  their  securities  with  a  well-known  house  than  with 
an  obscure  one ;  and  are  to  some  extent  influenced  by  the  implied 
approval  of  the  reorganization  plan  which  acceptance  of  deposits 
by  such  houses  involves. 

At  the  beginning  of  the  ordinary  reorganization,  then,  creditors, 
stockholders,  syndicate,  and  corporation  find  themselves  face  to  face. 
The  interests  of  the  syndicate  and  of  the  corporation  most  nearly 
coincide  except  in  so  far  as  the  syndicate  is  an  owner  of  stocks  or 
bonds.  The  syndicate  desires  a  radical  reorganization,  —  the  cor- 
poration requires  it.  But  as  between  stock-  and  bondholders  and  the 
corporation ;  between  the  stockholders  and  the  bondholders ;  or  be- 
tween the  junior  and  the  senior  bondholders ;  there  is  well-nigh  com- 
plete antagonism.  The  corporation,  to  repeat,  needs  a  reduction  in 
the  fixed  charges  which  it  has  to  pay.  The  securityholders  wish  to 
lose  as  little  as  possible.  The  stockholders  hope  to  force  sacrifices 
from  the  bondholders,  and  the  bondholders  to  levy  a  heavy  assess- 
ment upon  the  stock.  The  junior  bondholders  call  upon  their  seniors 
to  bear  their  part ;  and  the  seniors  reply  that  they  are  well  secured 
and  that  the  juniors  and  the  stock  must  take  care  of  themselves. 

The  first  question  which  arises  is  that  of  the  cash  requirements. 
How  much  cash  must  be  raised  to  pay  off  the  floating  debt,  and  how 
much  working  cash  capital  will  the  new  corporation  require  ?  It  is 
almost  always  true  that  a  large  floating  debt  has  accumulated  prior 
to  reorganization.  The  Northern  Pacific  in  1893  had  a  gross  debt  of 
no  less  than  $15,000,000;  the  Reading  in  1895  one  °f  $13,800,000; 
the  Baltimore  &  Ohio  in  1896  one  of  $13,000,000;  the  Atchison  in 
1893  one  of  $16,000,000.  In  part  this  means  simply  the  accumu- 
lation of  unpaid  bills.  In  part,  however,  it  represents  promissory 
notes  or  other  short  time  paper  which  the  corporation  has  issued, 
generally  to  pay  current  indebtedness,  but  occasionally  for  financ- 
ing somewhat  extensive  operations.  Thus  Mr.  McLeod  carried 
his  purchases  of  New  England  railroad  stock  by  means  of  advances 
from  brokers,  and  the  Government  Directors  of  the  Union  Pacific 
reported  that  $15,000,000  out  of  $21,400,000  of  floating  debt  of 


CONCLUSION  349 

that  road  in  1891  were  the  result  of  expenditure  and  advances  in  the 
construction  of  branch  or  tributary  lines.  The  cost  of  carrying  such 
indebtedness  is  naturally  high.  Mr.  McLeod  is  reported  to  have 
paid  an  average  of  9  per  cent  for  his  loans.  The  reorganization 
committee  of  the  Atchison  stated  in  1895  that  during  the  five  years 
preceding,  the  road  had  paid  over  $1,100,000  in  discounts  and 
commissions  to  secure  the  renewal  of  $9,000,000  of  guarantee  fund 
notes.  And  floating  indebtedness  is  by  far  the  most  dangerous  as 
well  as  the  easiest  sort  of  obligation  to  incur.  It  represents  a  possible 
demand  for  large  sums  of  cash  on  short  notice  which  even  a  solvent 
company  may  find  it  impossible  to  meet ;  —  a  demand,  moreover, 
which  is  likely  to  be  made  at  a  moment  of  stringency  in  the  money 
market.  For  this  reason,  and  on  account  of  the  high  interest  de- 
manded, corporations  endeavor  to  fund  their  floating  debts  when 
these  reach  unwieldy  proportions.  In  1891  the  Union  Pacific  au- 
thorized three-year  6  per  cent  notes  to  the  amount  of  $24,000,000  to 
be  used  in  taking  up  its  floating  debt.  In  1893  the  Northern  Pacific 
authorized  $15,000,000  collateral  five-year  6  per  cent  notes  for  the 
same  purpose.  In  each  case  it  was  hoped  to  refund  these  short  time 
issues  with  bonds  of  longer  term  when  the  date  of  their  maturity 
should  arrive.  After  a  company  has  been  in  receivers'  hands,  issues 
of  receivers'  certificates  are  pretty  sure  to  swell  the  current  liabilities. 
These,  again,  may  be  issued  to  pay  current  bills,  or  to  maintain  or 
to  improve  the  railroad  when  other  resources  prove  insufficient. 
For  whatever  reason  incurred,  it  is  plain  that  the  problem  of  the 
floating  debt  is  a  serious  one  for  the  creditors  and  owners  of  a  bank- 
rupt road  to  meet.  If  the  provision  which  they  make  is  insufficient 
their  company  will  not  regain  a  safe  financial  footing.  And  if,  in 
addition  to  cancelling  the  debt  outstanding,  they  do  not  provide  a 
margin  for  working  capital,  the  company  will  be  forced  to  incur 
new  floating  debt  and  their  work  will  have  to  be  done  over  again. 

In  general  there  are  two  ways  by  which  cash  for  floating  debt  and 
working  capital  can  be  raised : 

(1)  By  assessment  on  securityholders. 

(2)  By  the  sale  of  securities. 

Sales  of  securities  may  comprise  the  sale  of  securities  of  the  bank* 
rupt,  or  of  other  corporations  held  in  that  company's  treasury,  or 


350  RAILROAD  REORGANIZATION 

they  may  be  sales  of  part  of  new  bond  or  stock  issues  reserved  for 
that  purpose.  In  1898  the  Baltimore  &  Ohio  sold  among  other 
things  $3,800,000  of  Western  Union  Telegraph  stock  held  in  its 
treasury  since  1887;  while  in  1889  the  Atchison  issued  and  sold 
$12,500,000  general  mortgage  43  and  $1,250,000  income  55.  When 
outside  securities  are  sold  the  value  of  which  is  in  no  way  dependent 
upon  the  prosperity  of  the  road  which  sells  them;  and  which  are 
such,  moreover,  as  the  selling  road  can  readily  spare,  this  method 
of  raising  capital  is  open  to  few  objections.  Its  chief  disadvantage 
is  that  the  sale  is  apt  to  be  made  at  a  time  when  the  level  of  general 
prosperity  is  not  high,  and  the  price  obtained  is  therefore  apt  to  be 
low.  But  the  question  is  quite  different  when  the  securities  are  those 
of  the  embarrassed  or  bankrupt  road  itself.  In  this  case  the  credit 
of  the  company  and  the  price  of  its  securities  are  sure  to  be  at  a  low 
ebb.  The  initial  sacrifice  entailed  is  necessarily  great ;  while  if  the 
securities  sold  are  bonds,  as  they  are  almost  sure  to  be,  the  company 
increases  its  annual  interest  charge  without  receiving  an  equival- 
ent value  in  return.  If,  on  the  other  hand,  the  railroad  endeavors 
to  prevent  a  rise  in  charges  by  the  use  of  income  bonds  or  stock, 
the  gain  is  usually  neutralized  by  the  extremely  low  price  obtained.1 
In  general  we  may  say  that  sale  of  a  railroad's  securities  in  time  of 
general  depression  is  impossible  except  at  a  ruinous  sacrifice ;  that 
sales  should  not  be  resorted  to  at  all  except  when  the  road's  difficult- 
ies are  acute  rather  than  chronic,  as  in  the  case  of  the  Reading  in 
1896 ;  and  that  when  securities  are  to  be  sold  the  best  of  the  avail- 
able fyond  issues  should  be  used  and  not  the  worst. 

The  case  of  an  assessment  is  very  different.  Securities  may  be 
sold  to  outsiders  or  to  present  securityholders.  In  the  one  event 
no  pressure  at  all  can  be  brought  to  bear ;  in  the  other  only  that  of 
the  indirect  loss  which  the  difficulties  of  the  reorganizing  company 
would  involve.2  An  assessment,  on  the  other  hand,  is  levied  solely 

1  H.  V.  Poor  (Manual,    1900)  compiles  the  following  statement  for  57  selected 
companies  reorganized  between  1886  and  1898: 

Securities  provided  for  other  corporate  purposes  of  new  companies 
Capital  stock :  Preferred,  $89,971,268       Bonded  Indebt.  Int.-bearing,  $538,277,638 
Common,     96,555,753  Income,  48,902,701 

2  Where  stock-  or  bondholders  are  compelled  to  subscribe  to  an  issue  of  nevr 
securities  the  operation  becomes  an  assessment  and  not  a  sale. 


CONCLUSION  351 

on  securityholders  and  is  compulsory.  Stockholders  or  bondholders 
who  refuse  to  pay  are  ordinarily  debarred  from  all  participation  in 
the  reorganization,  and  lose  all  chance  to  recoup  their  losses  from 
their  share  in  subsequent  prosperity.  In  return  for  the  assessment 
some  security  is  usually  given,  so  that  from  one  point  of  view  an  as- 
sessment and  a  sale  resemble  each  other.  But  the  element  of  com- 
pulsion appears  in  this :  namely,  that  in  the  case  of  a  sale  the  new 
securities  are  taken  at  the  buyers'  valuation ;  but  in  the  case  of  an 
assessment  the  company  determines  what  it  shall  give  for  the  cash 
paid  in.  Hence  the  usual  compensation  for  an  assessment  is  an 
equal  nominal  amount  of  preferred  stock ;  —  while  that  for  the 
purchase  money  in  a  sale  is  a  greater  nominal  amount  in  bonds. 
Either  an  assessment  or  a  sale  of  securities  may  be  fortified  by  a 
syndicate  guarantee.  In  the  one  case  the  syndicate  agrees  to  sub- 
stitute itself  for  all  non-assenting  or  defaulting  stock-  or  junior  bond- 
holders ;  in  the  other  it  engages  to  take  and  dispose  of  the  new  secur- 
ities offered,  or  such  part  of  them  as  the  company  is  unable  to  sell. 
The  advantages  of  syndicate  assistance  we  have  already  discussed. 

It  will  be  recalled  that  both  assessments  and  sales  of  securities 
have  been  freely  employed  in  the  reorganizations  which  have  been 
considered,  and  that  syndicate  guarantees  have  been  of  ordinary 
occurrence.  Out  of  eighteen  reorganizations,  fourteen  were  forced 
to  pay  attention  to  the  raising  of  cash ;  the  four  which  did  not  consist- 
ing of  the  consolidation  of  the  Union  Pacific  with  the  Kansas  Pacific 
and  of  the  Chicago,  Rock  Island  &  Pacific  with  its  branch  lines  in 
1880,  the  income  conversion  reorganization  of  the  Atchison  in  1892, 
and  the  Rock  Island  reorganization  of  1902,  — each  a  reorganiza- 
tion of  a  more  or  less  peculiar  nature.  Of  the  fourteen  remaining, 
four  provided  cash  by  assessment,  three  by  the  issue  of  securities, 
and  five  by  a  combination  of  both  methods.  Adding  to  this  the 
Northern  Pacific  reorganization  of  1896  and  that  of  the  Erie  in 
1859,  which  combined  an  assessment  with  funding  provisions,  we 
have  eleven  reorganizations  which  relied  on  assessments  in  whole  or 
hi  part.  This  preponderance  is,  however,  due  to  the  extensive  use 
of  assessments  from  1893  to  1898;  since  the  earlier  reorganizations 
show  assessments  in  only  about  one-half  of  the  cases.  This  does  not 
mean  that  the  value  of  an  assessment  was  not  understood  before 


352 


RAILROAD  REORGANIZATION 


1893.  For  the  reorganization  of  the  Northern  Pacific  in  1895  was 
otherwise  so  radical  that  an  assessment  was  less  necessary ;  and  that 
of  the  Atchison  in  1889  took  place  at  a  time  when  business  conditions 
were  not  in  general  depressed.  The  effect  of  widespread  depression 
on  the  means  employed  for  raising  cash  is,  however,  perfectly  clear. l 
Of  the  reorganizations  of  1893  to  1898,  to  repeat,  there  was  none 
which  we  have  considered  which  did  not  make  use  of  assessments. 
The  following  table  shows  the  amount  and  distribution  thereof : 

Assessments,  1893-8 


Common       ist  Pre-   2d  Pre- 


Atchison 
B.  &O. 
Erie 
N.  Pac. 
Richm.  Term. 
E.  Tenn. 
Reading 

U.  Pac. 


Stock 

$10 
20 

12 

15 
10 

7.20 
20 

IS 


jerred    jerred  Junior  Securities 

$20       4  per  cent  on  2d  mortgage  and  income 

$2          . 

8 
10 


20  per  cent  on  i,  2,  and  3  incomes 
4  per  cent  on  deferred  incomes 


It  thus  appears  that  the  assessments  varied  from  $7.20  on  the  East 
Tennessee  to  $20  on  Reading  common,  with  less  sums  on  the 
preferred  stock  and  the  junior  securities.2  The  real  sacrifice  de- 
manded of  the  stockholders  is  ascertained  by  deducting  from  the 
above  the  value  of  securities  given  for  assessments  whenever  such 
were  allowed.  Taking  for  the  purpose  the  market  quotations  of  these 
securities  six  months  after  actual  reorganization,  that  is,  after  the 
sale  of  the  road,  or  the  putting  into  effect  of  the  plan  proposed, 
it  appears  that  the  common  stock  of  the  Atchison  received  $1.90; 
that  of  the  Baltimore  &  Ohio  $15.20 ;  that  of  the  Richmond  Terminal 
$5.02 ;  that  of  the  East  Tennessee  $3.55 ;  and  that  of  the  Union  Pacific 
$8.10.  The  Erie,  the  Northern  Pacific,  and  the  Reading  gave  nothing 

1  Among  the  reorganizations  of  the  eighties,  for  instance,  the  Denver    &  Rio 
Grande  levied  $8  per  share  in  1885  upon  its  $38,000,000  common  stock;  the  Pitts- 
burgh  &  Western  assessed  its  common  stock  4  per  cent  in  1887;  the  New  York, 
Chicago  &  St.  Louis  assessed  its  common  $10,  and  its  preferred  an  equal  sum ;  and 
the  Central  Iowa  levied  2  J  per  cent  on  its  debt  certificates,  5  per  cent  on  its  ist  pre- 
ferred stock,  10  per  cent  on  its  2d  preferred,  and  15  per  cent  on  its  common.  See 
Chron.  40:  480;  Ibid.  44:  212,  370,  653. 

2  A  syndicate  guaranteed  the  assessment  in  each  case  between  1893  and  1898. 
The  Reading  assessment  is  calculated  on  a  par  of  $100. 


CONCLUSION 


353 


for  assessments  in  the  nineties.1  Preferred  stock,  whenever  as- 
sessed, received  the  same  relative  amount  and  kind  of  securities 
for  assessment  as  did  the  common  stock,  and  the  same  is  true  of  the 
junior  securities.  Since,  however,  these  new  securities  had  but  a 
prospective  value  at  the  time  of  the  issue  of  the  various  reorganiza- 
tion plans,  it  is  advisable  to  make  no  attempt  to  determine  precisely 
the  net  assessment,  and  to  call  attention  to  their  allowance  merely 
as  a  fact  on  which  the  stockholders  could  rely  as  they  could  count 
on  a  future  rise  in  the  value  of  their  shares.  With  this  qualification 
the  relative  height  of  assessments  and  stock  quotations  one  month 
after  the  publication  of  each  reorganization  plan,  and  six  months 
after  the  completion  of  each  reorganization  may  be  given. 

Six  Reorganizations,  1893-8 


Atchison 
B.  &0. 
Erie 
N.  Pac. 
Reading 
Richm.  Term. 
E.  Tenn. 
U.  Pac. 


E.  Tenn.,  '86 
Erie,  '59 
Erie,  '77 
Reading,  '86 


Assess- 
ments 
$10 

20 
12 

15 

20 
10 

7.20 
15 


ion  Stock 

Preferred  Stock 

Price 

Price 

Price 

6  months 

Price 

6  months 

i  month 

after 

i  month 

after 

after 

reorgan- 

Assess- 

after 

reorgan- 

plan 

ization 

ments 

plan 

ization 

*sJ 

$13^ 

12$ 

56f 

$20 

$114 

8} 

14i 

8 

$22 

3^i 

i$ 

13* 

10 

IO 

26! 

2j 

22* 

10 


10* 


20 


Four  Reorganizations  before  1893 

6  2$              5$ 

2$  z\ 

4  18*  2 

TO  38!            58  10 


29 
53*' 


1  The  assessments  before  1893  were  as  follows:  The  Erie  levied  2$  per  cent  on 
its  common  and  preferred  in  1859,  and  a  minimum  of  $4  on  its  common  and  $2  on 
its  preferred  in  1877,  with  no  allowance  of  new  securities  in  either  case.  The  East 
Tennessee  assessed  its  common  stock  6  per  cent  and  its  income  mortgage  5  per  cent 
in  1886,  and  gave  to  the  one  a  corresponding  amount  of  2d  preferred,  and  to  the 
other  of  ist  preferred  stock.  The  Reading  assessments  in  1886  ranged  from  2\  per 
cent  on  the  deferred  incomes  to  15  per  cent  on  certain  junior  securities,  with  an  assess- 
ment of  $10  on  both  classes  of  stock.  Preferred  stock  was  given  for  all  assessments 
up  to  the  full  amount  of  the  sums  taken. 

3  The  quotations  six  months  after  reorganization  are  for  the  combined  securities 


354  RAILROAD  REORGANIZATION 

In  every  case  during  the  nineties  the  amount  of  assessment  ex- 
ceeded the  sum  for  which  common  shareholders  could  have  sold 
their  stock  one  month  after  the  publication  of  the  reorganization 
plan.  The  difference  ranged  from  $3.50  for  the  Erie  to  $17!  for 
the  Reading;  in  other  words  the  assessments  wiped  out  the  whole 
value  remaining  to  common  stockholders,  and  exacted  an  additional 
contribution  as  the  price  of  participation  in  any  future  prosperity. 
In  the  case  of  the  preferred  stock,  where  values  were  greater  and 
assessments  less  heavy,  the  results  were  not  the  same ;  but  even  here 
the  proportional  demand  was  large,  and  amounted  to  100  per  cent 
of  current  quotations  in  the  case  of  the  Northern  Pacific.  Before 
1893  assessments  were  fewer  in  number  and  not  so  great  in  amount. 
It  is  to  the  subsequent  rise  in  stock  quotations  to  which  we  must 
turn  for  an  explanation  of  the  willingness  of  stockholders  to  con- 
tribute such  heavy  sums.  The  assessments,  we  find,  did  not  come 
out  of  the  stockholders'  pockets  in  the  end ;  for  their  payment,  in 
connection  with  other  features  of  reorganization,  so  enhanced  the 
value  of  shares  that  only  six  months  after  reorganization  the  price 
of  stocks  in  all  cases  was  nearly  equal  to  the  assessment  plus  the 
previous  market  quotation.  In  some  instances,  such  as  the  Baltimore 
&  Ohio,  the  sum  amounted  to  much  more  than  this  total.1  Refusal 
to  pay  would  have  wiped  out  the  stockholder's  interest  and  have 
kept  him  from  benefiting  from  the  rise.  It  is  needless  to  add  that 
quotations  to-day  are  many  times  the  amount  of  the  assessments. 
The  increase  in  value  has  occurred  alike  for  common  and  preferred 
stock,  even  in  times  of  severe  depression.  On  the  whole,  it  has 
abundantly  justified  the  payments  which  stockholders  were  asked 
to  make. 

The  use  of  assessments  alone  represents  the  most  radical  and  the 
soundest  method  of  raising  cash.  It  disposes  of  the  accumulated 
quick  liabilities  once  and  for  all ;  and  involves  no  subsequent  increase 

given  in  exchange  for  the  old  preferred  stock.  In  the  case  of  the  Baltimore  &  Ohio 
e.  g.,  this  was  150  per  cent  in  new  common;  for  the  Northern  Pacific  it  was  50  per 
cent  new  common  and  50  per  cent  new  preferred.  Only  $5,000,000  of  Baltimore  & 
Ohio  preferred  stock  were  outstanding  before  the  reorganization  of  1898,  and  no 
record  of  quotations  can  be  found.  Quotations  are  similarly  unobtainable  for  the 
Reading  in  1886.  .  0' 

1  The  very  large  increase  in  the  Baltimore  &  Ohio  quotations  was  doubtless  due 
to  the  lateness  of  the  reorganization. 


CONCLUSION  355 

in  interest  charges.  It  was  the  method  of  the  Atchison  and  the  Union 
Pacific  after  1893,  of  the  Reading  from  1883-6,  and  of  the  Erie  from 
1875-7.  ^  was  furthermore  the  method  of  the  Western,  New  York 
&  Pennsylvania  in  1893,*  of  the  Norfolk  &  Western  in  1896,*  and 
of  other  railroads  which  might  be  named.  Probably  its  most  drastic 
application  was  in  the  case  of  the  Houston  &  Texas  Central  in  1887, 
where  an  assessment  of  73  per  cent  was  found  necessary  to  dis- 
charge the  floating  debt  and  to  provide  cash  payments  for  interest 
and  bonus  to  first  mortgage  bondholders,  and  to  pay  the  charges, 
expenses,  and  other  liabilities  made  or  incurred  by  the  Trust  Com- 
pany.3 

The  sale  of  securities  also  has  been  relied  upon  for  the  production 
of  cash.  The  most  striking  example  of  the  use  of  securities  alone 
is  afforded  by  the  Reading  reorganization  of  1883,  which  at  the 
same  time  illustrates  the  possible  unsoundness  of  the  method.  The 
floating  debt  of  the  Reading  companies  amounted  in  June,  1880, 
to  $12,155,248,  the  bulk  having  been  incurred  in  attempts  to  main- 
tain solvency.  To  cover  this  Mr.  Gowen  proposed  an  issue  of 
$34,300,000  deferred  income  bonds,4  to  be  sold  at  30  per  cent  of  their 
par  value,  and  to  be  entitled  to  dividends  after  6  per  cent  had  been 
paid  on  the  common  stock.  These  securities  were  practically  worth- 
less, and  had  to  be  set  aside  in  favor,  first,  of  new  general  mortgage 
bonds,  and  then  of  old  unissued  general  mortgage  7  per  cent  bonds 
which  the  company  happened  to  have  in  its  treasury.  So  ineffective 
was  even  this  expedient  that  in  October,  1884,  the  floating  debt 
amounted  to  a  sum  nearly  one-third  greater  than  that  reported  in 
1880.  Another  example  was  the  Erie  scheme  of  1886,  which  was  not, 
however,  a  reorganization,  according  to  our  definition.  The  floating 
debt  of  the  Erie  in  September,  1884,  amounted  to  $5,455,338,  of  which 
$1,007,922  consisted  of  unpaid  coupons.  On  the  suggestion  of  Eng- 
lish securityholders  these  coupons  were  funded ;  and  the  balance  was 
raised  by  a  new  terminal  mortgage  issued  and  disposed  of  by  a  sub- 
sidiary terminal  corporation  known  as  the  Long  Dock  Company. 
The  result  was  an  increase  in  fixed  charges,  which  contributed  to  the 

1  Chron.  Investors'  Supplement,  January,  1894. 

7  Ibid.  62:  641,  1896. 

3  Chron.  45:  792,  1887  (reorganization  plan).   See  also  Chron.  49:  269,  1889. 

4  Pages  84-5,  supra. 


356  RAILROAD  REORGANIZATION 

final  failure  in  1893.  The  history  of  the  Southern  Railway  affords 
a  third  example.  At  the  end  of  1888  the  Richmond  &  West  Point 
Terminal  Railway  &  Warehouse  Company  found  itself  with  a  float- 
ing debt  of  $5,000,000,  and  proceeded  to  authorize  an  isssue  of 
$24,300,000  5  per  cent  25-year  collateral  trust  bonds, of  which  $5,000,- 
ooo  were  to  be  sold  to  cancel  this  indebtedness.  In  subsequent  years 
the  current  liabilities  again  increased,  and  for  this  and  other  reasons 
a  general  reorganization  became  necessary,  in  which  both  an  assess- 
ment and  a  sale  of  securities  were  required.  On  the  whole  the  result 
of  experience  bears  out  the  statement  as  to  the  unsoundness  of  re- 
liance on  the  issue  of  securities  for  cash  even  when  the  sale  of  the 
securities  is  guaranteed. 

1  Yet  another  method  of  raising  cash  has  been  the  combination  of 
\assessments  with  the  sale  of  bonds  or  stock  or  both.  In  1898  the 
Baltimore  &  Ohio  disposed  of  $3,800,000  Western  Union  Telegraph 
stock.  It  also  provided  a  total  of  $37,900,000  prior  lien  and  first  mort- 
gage bonds  and  preferred  stock,  which  was  in  part  given  for  assess- 
ments, and  in  part  turned  over  to  a  syndicate  in  return  for  cash. 
The  Erie,  in  1895,  besides  its  assessment  sold  $15,000,000  in  prior 
lien  bonds ;  while  the  Reading  sold  $4,000,000  in  new  general  mort- 
gage bonds  and  $8,000,000  in  new  first  preferred  stock.  In  each  case 
the  success  of  the  sale  was  ensured  by  a  syndicate  agreement.  In 
1886,  to  go  outside  of  the  reorganizations  which  have  been  particu- 
larly described,  the  Texas  &  Pacific  provided  funds  with  which 
to  cancel  a  part  of  its  floating  debt  by  an  assessment  of  $10  and  an 
issue  of  $6,500,000  common  stock.  Three  years  later,  the  St.  Louis, 
Arkansas  &  Texas  assessed  its  second  mortgage  bondholders  5  per 
cent  and  its  stock  10  per  cent  and  sold  securities  to  the  par  value  of 
$4,490,880  to  cover  $3,400,000  of  cash  requirements.1  In  1894  the 
New  York  &  New  England  issued  $4,355,000  in  securities  and 
levied  $20  and  $25  respectively  upon  its  common  and  preferred 
shares.2  In  1896  the  St.  Louis  &  San  Francisco  planned  to  raise 
$821,410  by  assessment  and  $5,500,000  by  sale  of  securities.  Such 
examples  might  be  multiplied  indefinitely.3 

1  Chron.  50:  141,  1890.  2  Ibid.  58:  762,  1894. 

8  Chron.  62 :  829,  1896.  Poor  states  in  his  Manual  for  1900  that  of  $96,094,960 
of  assessments  levied  on  securities  of  fifty-seven  selected  companies,  $86,972,703 
were  on  stock  and  $9,122,257  on  bonds. 


CONCLUSION 


357 


The  problem  of  cash  requirements  must  be  met  and  solved  before 
the  parties  interested  can  consider  the  fixed  charges.  It  is  the  reduc- 
tion in  charges,  nevertheless,  which  is  usually  of  the  more  funda- 
mental importance.  A  floating  debt  accumulated  through  inability 
to  pay  current  expenses  is  the  direct  result  of  excessive  charges, 
and  a  settlement  which  did  not  lower  these,  as  well  as  pay  off  the 
debt,  could  give  but  temporary  relief.  Only  when  failure  has  been 
due  to  special  causes  can  a  decrease  in  the  annual  burden  be  even 
a  matter  for  debate.  The  following  tables  show  the  absolute  changes 
brought  about  by  those  of  the  reorganizations  earlier  considered 
for  which  precise  figures  are  available : 

FIXED   CHARGES 
Seven  Reorganizations,  1893-8 


Percent 

Per  cent 

Road 

Before 

After 

decrease 

increase 

Atchison 

$9,423,160 

$6,486,842 

31.16 

B.&O. 

7,202,855 

6,359,896 

11.70 

Erie 

8,637,700 

8,126,283 

5-92 

N.  Pac. 

13,813,945 

6,761,960 

51.04 

Reading 

11,422,054 

9,043,944  l 

20.81 

Richm.  Term. 

system           7,408,584 

4,195,925 

44.04 

U.  Pac. 

7,085,921 

4,502,134 

43.62 

$65,084,219 

$45,576,984 

30.92 

Seven  Reorganizations  before  1893 

Atchison,  '89 

$11,157,770 

$7,256,054 

34-9 

Atchison,  '92, 

7,189,109 

9,423,160 

31.0 

E.  Tenn.  '86 

1,742,495 

1,167,000 

33.0 

Erie,  '75 

4,697,802 

5,215,146 

n.o 

Reading,  '80 

7,734,o3i 

H,535,078 

49.1 

Reading,  '83 

8,235,047 

7,581,032 

7-9 

Rk.  I.  '80 

1,508,089 

1,271,836 

16.3 

$43,276,372          $43>449.3o6  .53 

One  Reorganization,  1002 
Rk.  I.  '02  $4,780,649          $10,485,882  119.3 2 

1  The  figure  of  $9,043,944  is  the  true  figure  for  the  Reading  fixed  charges  after 
reorganization,  eliminating  duplications.    In  computing  the  percentage  of  charges 
to  earnings  in  1898,  however,  the  unrefined  figure  of  $12,210,291  is  used  in  connec- 
tion with  a  similarly  unrefined  figure  of  earnings. 

2  The  reorganizations  omitted  are  those  of  the  Union  Pacific  in  1880,  which  did 
not  alter  fixed  charges,  and  of  the  Erie  in  1859  and  the  Northern  Pacific  in  1875,  f°r 
which  precise  figures  are  not  available.    In  this  last  charges  were  almost  entirely 
removed ;  its  exclusion,  therefore,  tends  to  lessen  the  percentage  of  reduction  shown 
for  the  reorganizations  before  1893. 


358 


RAILROAD  REORGANIZATION 


From  these  tables,  it  appears  that  each  of  the  reorganizations 
from  1893-8  occasioned  an  absolute  reduction  in  fixed  charges  which 
varied  from  5.92  per  cent  in  the  case  of  the  Erie  to  51.04  per  cent 
in  that  of  the  Northern  Pacific.  On  the  other  hand  the  reductions  in 
the  earlier  reorganizations  were  more  irregular  and  were  exceeded 
by  the  increases.1  Absolute  figures,  however,  reveal  little.  Charges 
may  be  reduced  and  the  road  be  worse  off  than  before  because  of 
more  than  proportional  reductions  in  mileage  or  in  earnings.  The 
preceding  table  must  therefore  be  supplemented  by  one  showing 
the  changes  in  charges  per  mile  of  road  and  changes  in  the  relations 
of  charges  to  earnings. 

FIXED   CHARGES 
Seven  Reorganizations,  1893-8 


Atchison 

B.&O. 

Erie 

N.  Pac. 

Reading 

Southern 

U.  Pac. 


Charges  per  mile 

Before  After 

$1415  $1001 

3438  3107 

4116  3824 

2630  1494 

9856  6611 

1553  955 


Per  cent  of  charges  to  net  income 


Before 
110.5 
98.2 
114.7 
106.8 
111.3 
105.1 
105-7 


Seven  Reorganizations  before  1893 


Atchison,  '89 

$1603 

$1064 

Atchison,  '92 

1079 

1415 

E.  Tenn.  '86 

1578 

1083 

Erie,  '75 

4984 

56l9 

Reading,  '80 

9138 

7287 

Reading,  '83 

8760 

7^5 

Rk.  L,  '80 

1200 

952 

Rk.  I.  '02 


One  Reorganization,  1902 
1231          1448 


85-8 

134-3 

93-9 

98.1 

78.3 
13.2 


39-8 


After 

80.9 

86.3 

95-8 

50.2 

82.1 

81.5 
40.6 


110.5 

79-5 
91.1 
83.0 
77.0 

10.2 


59-o 


1  The  six  reorganizations  before  1893  include  that  of  the  Atchison  in  1892,  which 
was  not  caused  by  inability  to  earn  charges,  and  consequently  made  no  attempt  to 
lower  their  figure.    Excluding  this  reorganization,  the  reductions  in  charges  before 
1893  overbalanced  the  increases.    H.  V.  Poor  calculates  the  absolute  reduction  in 
fixed  charges  for  sixty-eight  railroads  reorganized  between  1885  and  1897  at  $24,- 
007,490.    (Manual,  1900,  p.  cvi,) 

2  The  decrease  in  charges  per  mile  for  the  Reading  in  1880  was  due,  not  to  any 
reduction  in  charges,  but  to  an  increase  in  mileage  through  the  lease  of  the  Central 
Railroad  of  New  Jersey.   In  this  case  the  increase  in  absolute  charges  better  repre- 
sents the  real  effect  of  the  reorganization. 


CONCLUSION  359 

A  summary  of  the  preceding  tables  is  as  follows: 
FIXED   CHARGES   BEFORE  AND   AFTER  REORGANIZATION 

Seven  Reorganizations,  1893-8 
Per  cent  Decrease  Per  cent  Increase 


Absolute 

Charges 

Charges 

Absolute     Charges       Charges 

Charges 

to  income 

per  mile 

Charges    to  Income     per  mile 

Atchison 

3" 

26.7 

29.2 

B.   &0. 

11.7 

12.  1 

9.6 

Erie 

5-9 

I6.4 

7.0 

N.  Pac. 

51.0 

53-o 

43-o 

Reading 

20.8 

26.2 

32-9 

Southern 

44.0 

22.4 

37-7 

U.  Pac. 

43^ 

to* 

57-5 

30-9 

31.2 

31.2 

Seven  Reorganizations  before  1893 


Atchison,  '89  34.9 

33-6 

Atchison,  '92 

E.  Tenn.  '86   33.0 

40.8 

3i-3 

Erie,  '75 

2.9 

Reading,  '80 

15-3 

20.  2 

Reading,  '83      7.9 

2.2 

17.9 

Rk.  I.  '80        16.3 

22.7 

20.6 

31.0  28.5         31.1 

u.o  12.7 

49.1 


i3-i  53 

One  Reorganization,  1902 
Rk.  I.  '02  119.3  48-2 

1  It  is  perhaps  unnecessary  to  warn  the  reader  that  these  tables  can  be  taken  as 
generally  indicative  only.  The  percentage  of  charges  to  earnings  varies  not  only 
with  charges  but  with  earnings;  and  an  increase  or  decrease  in  the  latter  may  con- 
ceal a  decidedly-  contrary  movement  in  the  former.  Since  the  reorganizations  were 
accomplished  at  different  dates  the  error  is  not  in  all  cases  in  the  same  direction, 
and  in  particular  the  percentage  of  charges  to  earnings  for  one  road  cannot  be  com- 
pared with  the  percentage  for  another.  The  figures  of  charges  per  mile  of  line  are 
somewhat  more  reliable,  but  are  nevertheless  to  be  used  with  care.  Different  rail- 
roads report  their  mileage  differently,  and  it  has  not  been  possible  in  all  cases  to  use 
the  homogeneous  figure  of  mileage  operated.  Further,  the  significance  of  high  charges 
per  mile  varies  with  the  character  of  the  mileage.  A  reorganization  which  lops  off 
many  unprofitable  branch  lines  may  conceivably  cause  thereby  an  increase  in  the 
charges  per  mile  of  road  remaining,  and  yet  place  the  system  in  a  much  stronger 
position  than  before.  This  difficulty  disappears  if  the  figure  of  charges  per  mile  be 
used  in  connection  with  the  percentage  of  charges  to  earnings,  and  in  general  the 
three  columns  given  correct  each  other. 


360  RAILROAD  REORGANIZATION 

These  tables  show  plainly  that  substantial  reduction  in  fixed 
charges  was  the  rule  in  the  reorganizations  of  1893-8,  though  less 
universal  and  less  important  in  the  reorganizations  before  that  date. 
Even  before  1893,  however,  the  fact  that  reductions  must  be  made 
was  apparent.  Three  reorganizations  increased  absolute  charges 
instead  of  decreasing  them.  Of  these  the  Atchison  reorganization  of 
1892  was  not  due  to  lack  of  prosperity,  and  the  Erie  reorganization 
was  a  failure.  The  Reading  reorganization  of  1880  increased  abso- 
lute charges,  increased  mileage  more  than  correspondingly,  but  was 
also  a  failure.  And  it  is  significant  that  only  those  roads  which  gener- 
ously reduced  charges  regained  even  a  temporary  prosperity. 

The  distribution  of  losses  which  a  reduction  in  fixed  charges 
requires  can  best  be  made  by  a  comprehensive  redistribution  of  secur- 
ities. All  the  bonds  and  stocks  wKich  are  to  suffer  must  be  called  in ; 
and  varying  amounts  of  new  securities  must  be  given  in  their  place. 
Among  the  important  considerations  to  those  who  fix  the  rates  for 
exchanges  are  these: 

(1)  Maximum  charges  under  the  new  regime  should  approximate 
minimum  net  earnings  under  the  old. 

(2)  As  large  a  proportion  of  the  charges  as  possible  should  consist 
of  the  one  item  of  interest  on  bonds. 

(3)  Losses  should  fall  most  heavily  on  the  junior  securityholders. 

(4)  The  nominal  value  of  outstanding  securities  should  be  reduced 
as  little  as  possible. 

(5)  Bondholders  whose  claims  have  been  cut  down  should  be 
afforded  some  chance  to  participate  in  future  increased  earnings  of 
the  property. 

These  rules  may  be  considered  in  turn.  The  point  to  which  the 
best  practice  should  reduce  fixed  charges  is  readily  understood. 
Nothing  less  than  solvency  under  the  least  favorable  conditions  is  the 
goal  toward  which  a  reorganization  plan  should  strive.  It  appears, 
accordingly,  that  the  minimum  earnings  of  the  Atchison  property 
from  1891-4  had  been  $5,204,880;  while  the  fixed  charges  proposed 
for  it  were  $4,528,547.  The  lowest  net  earnings  which  the  Union 
Pacific  had  ever  recorded  had  been  $4,315,077.  The  interest  on  its 
new  bonded  indebtedness  was  placed  at  $4,000,000.  The  net  earn- 
ings for  the  Northern  Pacific  in  1895  were  $6,052,660,  which  was  the 


CONCLUSION  361 

least  that  the  road  had  earned  for  eight  years.  The  new  fixed  charges 
were  estimated  at  $6,015,846.  The  minimum  net  earnings  of  the 
Baltimore  &  Ohio  from  1887  to  1898  had  been  $6,610,774.  The 
fixed  charges  of  the  plan  of  1898  were  set  at  $6,252,351. 

In  order  to  simplify  the  charges,  as  well  as  for  other  reasons,  it  is 
desirable  to  have  the  item  of  interest  bear  a  large  proportion  to  the 
whole.  The  fixed  charges  of  six  of  our  seven  reorganizations  from 
1893-8  amounted  together  to  $54,562,165.  Of  this  sum,  interest  on 
bonds  comprised  $35,239,146  or  some  64  per  cent.  The  charges  of 
the  same  railroads  after  reorganization  amounted  to  $36,533,040,  of 
which  sum  interest  on  bonds  comprised  $30,926,638  or  84  per  cent. 

The  distribution  of  losses  should  bear  most  heavily  on  the  junior 
securities.  The  simplest  readjustment  would  seem  at  first  sight 
to  demand  a  proportionate  concession  from  all  creditors.  But  this 
would  be  both  unjust  and  impossible.  In  no  sense  do  all  bond-  and 
stockholders  stand  upon  an  equal  footing.  In  the  first  place,  the  cost 
at  which  senior  bondholders  have  acquired  their  claims  has  much 
exceeded  the  cost  at  which  junior  bondholders  and  stockholders  have 
acquired  securities  of  equal  nominal  amount.  Apparently  equal 
claims  represent  very  unequal  investment.  In  the  second  place  this 
increased  cost  has  been  due  to  certain  legal  provisions  touching 
security  which  become  prominent  during  reorganization.  All  mort- 
gage bonds  possess  by  law  a  lien  upon  the  property  pledged  to  secure 
them.  Upon  default  in  repayment  of  principal,  and  usually  also 
upon  default  in  payment  of  regular  interest,  their  owners  have  the 
right  to  sell  the  pledged  property  at  auction  and  to  recoup  themselves 
from  the  proceeds.  After  the  underlying  bonds  have  been  satisfied 
the  selling  price  is  applied  as  far  as  it  will  go  to  the  settlement  in  full 
of  mortgages  in  the  order  of  their  issue ;  while  the  stock,  representing 
the  owners  of  the  property,  takes  what  is  left.  As  a  rule  a  railroad 
will  not  sell  for  anything  like  the  sum  required  to  pay  off  all  its  mort- 
gages, and  the  junior  issues  are  threatened  with  extinction.  Usually, 
however,  it  is  possible  for  the  junior  to  guarantee  interest  on  the 
senior  bonds,  or  to  buy  the  railroad  at  foreclosure  sale  under  some 
senior  mortgage,  thus  preserving  to  themselves  the  benefit  of  the 
earning  power  of  the  corporation.  When  this  is  done  earnings  are 
distributed  according  to  the  relative  priority  of  the  various  junior 


362  RAILROAD  REORGANIZATION 

issues  on  penalty  of  still  further  foreclosure  and  readjustment.  The 
principle  of  reorganization  which  is  followed  prescribes  because  of 
this  the  payment  in  full  of  all  claims  which  can  be  satisfied  by  the 
purchase  price  of  the  bankrupt  railroad  at  foreclosure  sale,  and  the 
distribution  of  losses  among  the  remainder  according  to  the  relative 
priority  of  their  liens. 

The  consent  of  securityholders  to  a  reduction  in  their  claim  to  an 
annual  return  is  more  easily  obtained  if  the  nominal  value  of  their 
holdings  be  little  or  not  at  all  reduced.  There  is  a  magic  in  the  par 
value  stamped  upon  a  certificate  which  affords  a  certain  consolation 
to  those  from  whom  sacrifices  in  interest  are  demanded.  An  unim- 
paired principal,  moreover,  constitutes  a  real  advantage  when  the 
date  of  maturity  arrives.  But  if  the  low  earning  power  of  the  corpora- 
tion compels  it  to  ask  sacrifices  from  the  holders  of  its  securities,  it  is 
only  fair  that  these  sacrifices  should  cease  when  the  earning  power 
improves.  In  other  words,  it  is  but  just  that  old  bondholders  be 
given  securities  upon  which  payment  of  interest  is  optional,  so  that 
they  may  share  in  future  prosperity,  and  obtain  the  same  return 
which  they  once  enjoyed  whenever  the  road  earns  enough  to  pay  it. 

The  foregoing  rules  dictate  the  amount  of  reduction  to  be  made  in 
charges,  and  also  the  kind  and  amount  of  new  securities  which  are 
usually  offered  in  the  exchanges.  Interest  and  rentals  must  be  cut 
down  without  decreasing  the  nominal  value  of  the  securities  out- 
standing. To  reduce  interest  without  reducing  nominal  value,  either 
the  interest  rate  on  outstanding  securities  must  be  lowered,  or  mort- 
gage bonds  must  be  replaced  by  income  bonds  or  by  stock.  To 
reduce  rentals  annual  payments  may  be  arbitrarily  cut  down,  or 
rental  contracts  may  be  funded  into  mortgage  bonds.  These  differ- 
ent methods  may  be  taken  up  in  some  detail. 

The  accompanying  tables  (see  opposite  page)  show  for  fourteen 
reorganizations  the  number  and  amounts  of  outstanding  issues  before 
and  after  reorganization  at  the  various  rates  of  interest  designated. 

Few  collections  of  figures  in  railway  finance  deserve  more  careful 
attention  than  those  given  in  these  tables.  Whereas  the  greatest 
number  of  the  issues  before  the  seven  reorganizations  prior  to  1893 
bore  6  per  cent,  and  the  greatest  amount  outstanding  was  similarly 
at  that  rate ;  the  overwhelming  preponderance  in  amount  after  the 


CONCLUSION 


363 


reorganizations  of  1893-8  bore  4  per  cent,  and  a  total  of  14.7  per 
cent  of  all  the  bonds  outstanding  bore  a  lower  rate  of  interest  than 
had  appeared  at  all  at  the  earlier  date. 

BOND  ISSUES 
Seven  Reorganizations,  1893-8 


Before 

After 

Per  Cent    Number     Amount        Per  Cent          Number      Amount        Per  Cent 

7                 33       $56,741,222         6.1                   13 

$43,942,500 

4.9 

6                 85       300,925,695       32.7                   30 

82,586,000 

9-3 

5                  51       267,623,426      29.0                  23 

90,853,035 

10.3 

4i                ii          34 

,400,800        3.7                     5 

13,400,000          1.5 

4                   9       260,055,689      28.2                   16 

520,709,117 

59-o 

3i 

2 

76,733,350 

8.7 

3 

I 

53,350,000 

6.0 

189    $919,836,832     99.7                90 

$881,574,002 

99-7 

Not  specified               5 

,141,238 

1,000,529 

$924,978,070 

$882,574,531 

Seven  Reorganizations  before  1893 

7                 40    $153,251,000     23.7                   21 

$81,327,544 

10.3 

6                 59      173,641,700     26.8                   55 

150,999,589 

19.1 

5                 22      174,060,032    26.9                  16 

180,341,768 

22.8 

4$                 2          4,611,000        .7                    i 

79,000 

.01 

4                  5      140,041,700    21.6                    5 

375,881,614 

47.6 

128    $645,605,522    99.7                  98 

$788,629,515 

09.81 

Not  specified               5 

,712,749 

8,940,939 

$651,318,271 

$797,570,454 

Graphically  indicated  the  change  was  as  follows  : 

Rate  Per  Cent     *" 

Rate  Per  Cent 

8       3J     4 

44     5       6       7                                            9 

Si      4       4*     5       6 

T 

j 

\ 

Am't. 

Am't. 

/ 

\ 

Per* 

Per40 

/ 

\ 

Cent 

J  '  Cent* 

7 

\ 

/                                                        10  ^ 

if 

\ 

^ 

91 

I'  : 

Period  prior  to  1883  Period  of  1893-8. 

Comparing  the  total  interest  with  the  total  bond  issue,  we  find 
the  average  rate  to  have  decreased  from  5.5  per  cent  to  4.9  per  cent 
by  the  reorganizations  prior  to  1893,  and  from  5.1  per  cent  to  4.3  per 


364  RAILROAD  REORGANIZATION 

cent  by  the  reorganizations  of  1893-8.  Of  some  significance  is  a 
comparison  of  the  rates  prior  to  the  reorganizations  before  1893 
with  those  subsequent  to  the  reorganizations  of  1893-8.  The  total 
interest  payable  on  the  issues  at  the  later  date  was  $38,291,319.  If 
the  same  proportions  of  bonds  had  been  issued  at  the  same  rates  of 
interest  as  before  the  reorganizations  prior  to  1893,  this  interest 
would  have  amounted  to  $48,552,688.  The  total  interest  payable  on 
the  issues  before  the  reorganizations  prior  to  1893  was  $35,658,192. 
If  the  same  proportions  of  bonds  had  been  then  outstanding  at 
the  same  rates  as  after  the  reorganizations  of  1893-8  the  interest 
charge  would  have  been  $27,941,807.  Thus  in  the  first  case  there 
would  have  been  a  saving  of  $10,261,369  annually,  and  in  the  second 
case  one  of  $8,279,775.  This  computation  is  inexact  because  it  fails 
to  take  account  of  the  normal  reduction  of  interest  rates  due  to  im- 
proved credit  and  to  increased  prosperity  from  causes  other  than 
reorganization ;  but  it  is  included  here  because,  in  the  first  place,  a 
large  part  of  the  reduction  was  due  to  actual  reorganization ;  and  in 
the  second  place,  because  much  of  the  improved  credit  is  attributable 
indirectly  to  reductions  of  charges  and  other  reorganization  features. 
It  should  be  noticed  that  the  new  bond  issues  not  only  bore  lower 
rates  of  interest,  but  were  of  greater  volume  and  of  longer  term  than 
the  issues  which  they  replaced.  The  greater  volume  is  reflected  in  the 
considerable  reduction  in  the  number  of  issues  at  the  same  time  that 
the  total  amount  of  bonds  outstanding  decreased  slightly  or  in- 
creased. Thus  the  reorganizations  before  1893  increased  the  amount 
of  bond  issues  from  $645,605,522  to  $788,629,515,  and  decreased 
their  number  from  128  to  98;  while  the  reorganizations  of  1893-8 
decreased  the  amount  of  bonds  from  $919,836,832  to  $881,574,002, 
and  decreased  the  number  of  issues  from  189  to  90,  or  in  far  greater 
proportion.1  The  matter  may  be  viewed  in  another  way.  Just  before 
the  beginning  of  the  later  reorganizations  the  predominant  rate  of 
interest  for  the  roads  concerned  was  6  per  cent.  The  number  of 
issues  at  6  per  cent  outstanding  was  85  and  the  average  amount  per 
issue  was  $3,540,302.  The  predominant  rate  just  after  those  reorgan- 
izations was  4  per  cent.  The  number  of  issues  at  4  per  cent  outstand- 

1  These  figures  do  not  include  the  comparatively  small  amount  of  bonds  for  which 
no  interest  rate  was  specified. 


CONCLUSION  365 

ing  was  16,  and  the  average  amount  per  issue  was  $32,544,319.  In 
other  words,  the  process  was  to  replace  numerous  small  issues  which 
bore  high  rates  of  interest,  by  a  few  comprehensive  issues  at  lower 
rates ;  thus  simplifying  the  financial  situation,  as  well  as  lightening 
the  burdens  which  the  roads  had  to  bear. 

The  lengthening  of  the  terms  for  which  the  various  mortgages 
were  to  run  is  equally  apparent.  Before  its  reorganization  in  1897 
the  Union  Pacific  had  no  mortgage  issued  for  more  than  40  years. 
The  first  mortgage  of  1897  ran  f°r  5°  years.  The  Reading  in  1895 
had  four  mortgages,  all  issued  during  the  reorganization  of  1888, 
with  terms  of  70  years.  All  its  other  mortgages  were  for  shorter  pe- 
riods. In  1897  it  put  forth  a  grand  divisional  mortgage  with  a  term 
of  100  years.  The  Erie  in  1894  had  two  mortgages  of  91  years  each 
and  one  of  84  years,  issued  during  the  financial  scandals  of  1869,  but 
no  other  of  over  Si  ,000,000  which  ran  for  more  than  43  years.  Both 
its  prior  lien  and  its  general  mortgage  bonds  now  outstanding  are 
to  mature  101  years  from  date  of  issue.  The  Atchison  in  1889  could 
boast  of  only  one  mortgage  with  a  term  of  51  years.  Its  reorganiza- 
tion at  that  time  gave  it  two  of  100  years.  The  Northern  Pacific  is- 
sued one  loo-year  mortgage  in  the  course  of  its  troubles  in  1889, 
and  two  mortgages  for  101  and  150  years  respectively  in  its  reor- 
ganization of  1896.  The  reason  for  long  terms  has  been  the  wish 
to  make  new  mortgages  attractive.  Reorganization  mortgages,  as 
has  just  been  said,  tend  to  be  large  mortgages,  at  a  lessened  rate  of 
interest.  They  are  also  blanket  mortgages  with  an  inferior  lien. 
Some  inducement  besides  the  compulsion  of  necessity  is  useful  in 
securing  the  assent  of  old  bondholders  to  the  proposed  exchanges 
of  these  bonds  for  outstanding  securities.  The  long-term  bond  pro- 
tects the  holder  against  the  probable  steady  fall  in  the  rate  of  inter- 
est on  capital.  It  promises  him  advantage  in  the  future'in  return  for 
surrender  in  the  present. 

The  reduction  in  charges  by  the  substitution,  for  mortgage  bonds 
with  fixed  interest,  of  securities  upon  which  payment  of  interest  is 
optional,  has  been  as  important  as  the  reduction  in  the  rates  of 
interest  just  described.  Such  securities  may  be  either  income  bonds 
or  stock.  The  income  bond  has  a  lien  upon  railroad  property  simi- 
lar in  kind  to  the  lien  of  an  ordinary  mortgage.  Upon  default  in  the 


Atchison,  '95 
Atchison,  '89 
Reading,  '83 
Reading,  '80 

Before 

$22,347,227 
11,678,500 

After 
$51,728,000 
80,000,000 
56,389,466 
18,737,709 

366  RAILROAD  REORGANIZATION 

payment  of  its  principal  it  can  exercise  foreclosure  rights.  But  it 
has  no  claim  on  earnings  except  in  a  right  to  receive  dividends  out 
of  net  earnings  before  any  dividend  shall  be  paid  upon  the  stock. 
Stock  certificates  control  the  company  by  their  right  to  vote,1  but 
are  entitled  to  its  profits  only  after  expenses  of  every  kind  have  been 
met.  When  divided  into  preferred  and  common  shares  the  former 
receive  preference  in  dividends  and  sometimes  in  voting  power. 
Among  the  reorganizations  described  in  the  text  three  made  use  of 
income  bonds  before  1893  and  one  after  1893.  The  amounts  of  the 
issues  and  the  percentages  of  incomes  to  total  capitalization  before 
and  after  the  reorganizations  were  as  follows : 

Income  Bonds 

Per  cent 
Before      After 
31.8 
35-4 

2i-7         39-3 
15.0         19.3 

The  East  Tennessee  reorganization  of  1886  did  away  with  income 
bonds,  as  did  that  of  the  Atchison  in  1892.  It  will  be  noted  that  these 
bonds  were  more  used  before  1893,  owing  probably  to  the  fact  that 
the  name  of  bond  was  considered  to  increase  the  salability  of  a  se- 
curity on  the  market.  Securityholders  hesitated  to  accept  stock, 
but  received  bonds  without  too  great  a  protest.  The  extent  to  which 
railroads  catered  to  this  preference  is  seen  in  the  case  of  the  Read- 
ing deferred  income  bonds,  on  which  payment  of  interest  was  de- 
ferred to  a  6  per  cent  dividend  upon  the  common  stock.  From  certain 
points  of  view,  however,  the  income  bond  is  inferior  to  preferred 
stock.  For  instance,  preferred  stock  almost  always  has  voting  power, 
while  income  bonds  usually  have  none.  And  although  the  inc6me 
bondholder  is  sometimes  protected  from  the  insertion  of  new  claims 
upon  earnings  between  his  bond  and  the  underlying  property,  pro- 
visions in  preferred  stock  certificates  may  afford  an  equal  guaran- 
tee. In  consequence,  the  use  of  income  bonds  has  declined  as  a  more 
accurate  knowledge  of  their  limitations  has  become  widespread,  and 
the  Atchison  adjustment  45  represent  the  sole  use  of  this  security 
in  our  reorganizations  from  1893-8. 

1  Income  bonds  sometimes,  though  rarely,  possess  the  right  to  vote. 


CONCLUSION  367 

The  exchange  of  preferred  stock,  with  or  without  new  bonds,  for 
old  bonds  which  have  borne  a  fixed  interest  rate  represents  the  best 
current  practice.  Six  of  the  seven  principal  railways  reorganized 
from  1893-8  retired  old  bonds  with  fixed  interest  by  new  bonds  and 
preferred  stock  or  by  preferred  stock  alone.  Take  for  illustration 
the  case  of  the  Erie,  which  exchanged  new  general  lien  bonds  and 
preferred  stock  for  old  second  consolidated  bonds ;  of  the  Northern 
Pacific,  which  exchanged  new  prior  or  general  lien  bonds  and  pre- 
ferred stock  for  its  second  and  third  mortgages ;  of  the  Union  Pacific, 
which  gave  4  per  cent  bonds  and  preferred  stock  for  its  old  first 
mortgage  6s ;  exchanges  which  are  but  typical  of  a  widely  extended 
use.  Even  the  Reading,  which  alone  refused  so  to  lighten  the  claims 
upon  its  earnings,  employed  preferred  stock  in  retirement  of  old 
first,  second,  and  third  income  bonds. 

These  issues  were  all  protected  from  future  introduction  of  new 
bonds  between  them  and  their  property.  The  preferred  stock  cer- 
tificates of  the  Atchison  in  1897  contain  the  following  words:  "No 
mortgage,  other  than  its  general  and  its  adjustment  mortgage,  exe- 
cuted in  December,  1895,  shall  be  executed  by  the  company,  nor 
shall  the  amount  of  the  preferred  stock  be  increased  unless  the 
execution  of  such  mortgage  and  such  increase  of  preferred  stock 
shall  have  received  the  consent  of  the  holders  of  a  majority  of  the 
whole  amount  of  the  preferred  stock  which  shall  at  the  time  be  out- 
standing, given  at  a  meeting  of  the  stockholders  called  for  that  pur- 
pose, and  the  consent  of  the  holders  of  a  majority  of  such  part  of  the 
common  stock  as  shall  be  represented  at  that  meeting."  Similar 
restrictions  were  imposed  by  the  Southern  in  1893,  by  the  Erie  in 
1895,  by  the  Northern  Pacific  in  1896,  by  the  Reading  in  1896,  and 
by  the  Baltimore  &  Ohio  in  1898 ;  or  in  other  words  by  all  the  large 
corporations  except  the  Union  Pacific,  whose  failures  in  the  nineties 
we  have  described. 

As  for  the  years  before  1893,  in  them  the  use  of  preferred  stock 
was  known,  if  not  so  widely  resorted  to.  The  East  Tennessee  in 
1886  offered  new  consols  and  preferred  stock  for  old  consols,  divi- 
sional and  debenture  bonds.  In  1881  securityholders  of  the  Reading 
proposed,  and  in  1886  nearly  secured,  the  adoption  of  plans  which 
comprised  extensive  issues  of  preferred  stock  in  exchange  or  in 


368  RAILROAD  REORGANIZATION 

partial  exchange  for  old  mortgages.  The  influence  of  English  capi- 
tal, however,  and  the  liking  for  the  name  of  bond  to  which  we  have 
referred  seems  to  have  prevented  large  employment  of  the  device. 
Where  either  preferred  stock  or  income  bonds  were  used  protection 
was  afforded.  When,  in  1875,  all  the  outstanding  bonds  of  the 
Northern  Pacific  were  replaced  by  stock,  provision  was  made  for  an 
issue  of  first  mortgage  bonds  to  an  average  of  $25,000  per  mile  of 
road  completed ;  but  no  other  bonds  were  to  be  issued  except  on  a 
vote  of  at  least  three-fourths  of  the  preferred  stock  at  a  meeting  spe- 
cially held  in  reference  thereto  on  thirty  days'  notice.  In  the  Read- 
ing reorganization  of  1886  a  clause  provided  that  in  calculating  the 
net  earnings  from  which  dividends  on  income  bonds  should  be  paid 
there  should  be  deducted  from  gross  profits  operating  expenses,  taxes 
and  existing  rentals,  guarantees  and  interest  charges,  but  not  fixed 
charges  of  the  same  sort  subsequently  created.  And  in  the  case  of  the 
Atchisonin  1889  the  provision  that  no  bonds  could  be  inserted  be- 
tween the  incomes  and  the  general  mortgage  45  was  so  absolute  as  to 
prove  an  almost  complete  bar  to  new  issues. 

It  is  this  use  of  preferred  stock  and  income  bonds  which  makes  it 
possible  to  realize  the  last  and  highly  important  rule  which  the 
engineers  of  exchanges  have  in  mind.  Only  by  the  combined  use 
of  securities  upon  which  payment  of  interest  is  optional  with  se- 
curities upon  which  payment  is  obligatory  can  the  claims  which 
their  corporations  are  forced  to  meet  be  reduced,  while  at  the  same 
time  former  bondholders  are  given  the  chance  to  share  in  future 
prosperity.  Such  a  result  is  deliberately  sought.  "The  general 
theory  of  adjustment  of  disturbed  bonds,"  said  the  Richmond  Term- 
inal reorganization  plan  of  May,  1893,  "has  been  to  substitute 
for  them  the  new  5  per  cent  bonds  to  such  an  extent  as  is  warranted 
by  the  earnings  and  situation  of  the  properties  covered  by  the 
present  mortgages,  and  the  new  preferred  stock  for  the  remainder  of 
the  principal."  This  purpose  receives,  moreover,  a  natural  develop- 
ment. Justice  does  not  demand  that  old  bondholders  be  given  the 
unlimited  chance  at  future  surpluses  which  old  stockholders  should 
enjoy.  Their  former  holdings  could  expect  but  a  fixed  amount, 
and  the  maximum  to  be  paid  on  their  new  bonds  and  preferred 
stock  is  therefore  rightly  restricted.  But  fair  play  dictates  that  they 


CONCLUSION  369 

be  given  opportunity  to  receive  the  same  income  as  before.  If  they 
must  surrender  6  per  cent  bonds  in  exchange  for  4  per  cent  bonds 
it  is  equitable  to  allow  to  them  as  well  50  per  cent  of  their  original 
holdings  in  new  4  per  cent  preferred  stock.  The  corporation  thus 
announces  its  intention  of  saving  them  unharmed  if  it  can  possibly 
do  so,  while  it  insists  that  its  solvency  be  not  dependent  on  the  suc- 
cess of  its  attempt.  This  idea  has  been  realized  in  a  number  of  cases 
with  approximate  exactness.  The  old  third  mortgage  6  per  cent 
bonds  of  the  Northern  Pacific  in  1896  received  n8J  per  cent  in 
new  3  per  cents,  50  per  cent  in  4  per  cent  preferred  stock,  and  3  per 
cent  in  cash,  —  which  together  could  yield  nearly  the  same  as  the 
old  mortgage.  The  holders  of  Chicago  Division  55  of  the  Baltimore 
&  Ohio  in  1898  surrendered  an  annual  income  of  $50  for  a  chance 
to  receive  $50.30;  the  Union  Pacific  first  mortgage  6s  in  1898  ob- 
tained precisely  100  per  cent  in  new  4  per  cent  bonds  and  50  per 
cent  in  new  4  per  cent  stock.  It  would  be  too  much  to  expect  that 
such  exactness  should  generally  obtain.  The  variations  in  security 
between  issues,  the  well-founded  desire  to  distinguish  and  not  at 
the  same  time  to  swell  unduly  the  amount  of  new  stock  put  forth 
lead  to  fluctuations  both  above  and  below  the  point  of  equivalence 
of  return.  The  important  fact  to  remember  is  in  short  this:  that  the 
use  of  bonds  with  a  fixed  rate  of  interest,  together  with  bonds  or 
stock  upon  which  payment  of  interest  is  optional,  provides  that  com- 
promise between  the  interests  of  the  old  bondholders  and  the  inter- 
ests of  the  corporation  which  alone  can  afford  justice  to  both  sides 
and  can  allow  the  reorganization  to  proceed. 

The  matter  of  rentals  may  now  be  considered.  "The  extent  of 
the  reduction  in  rentals  from  reorganization,"  says  one  authority,1 
"  is  seen  where  the  reduction  of  this  item  of  fixed  charges  for  the  entire 
country  is  considered.  The  net  reduction  in  lease  rentals  from  1892 
to  1898  was  $24,527,000,  and  of  this  sum  $17,768,000  appears  in 
the  South  and  West  where  the  failures  were  most  numerous  and 
extensive.  The  reductions  of  rentals  are  most  conspicuous  in  the 
Northwest  and  Pacific  coast  railroads.  It  is  true  that  a  part  of  this 
decrease  in  rentals  is  to  be  ascribed  to  the  steady  movement  in  the 
direction  of  consolidation  which  is  constantly  converting  lease  into 

1  E.  S.  Meade,  Annals  Amer.  Acad.  Pol.  and  Soc.  Sci.  March,  1901. 


37° 


RAILROAD  REORGANIZATION 


purchase;  but  coming  so  close  together,  the  difference  between 
the  figures  of  1892  and  those  of  1898  is  sufficiently  marked  to  war- 
rant the  conclusion  that  most  of  the  reduction  is  due  to  the  numer- 
ous reorganizations  which  intervened." 

This  conclusion  is  at  first  sight  borne  out  by  the  following  tables, 
which  show  the  decreases  or  increases  in  absolute  rentals  and  in- 
terest for  thirteen  reorganizations,  of  which  six  fall  within  the  period 
covered  by  the  quotation : 

FIXED   CHARGES 
Six  Reorganizations,  1893-8 


Interest 

Rentals,  etc. 

Total  Charges 

Decrease 

Increase 

Decrease    Increase 

Decrease    Increase 

Atchison 

40.6 

13-7 

3I-J 

B.  &O. 

19.7 

77.2 

II.7 

Erie 

33-3 

62.7 

5-9 

N.  Pac. 

14.2 

88.9 

51.0 

Reading 

20.8 

U.  Pac. 

21.8 

78.2 

43-7 

Average 

decrease 

4-7 

58.8 

25-7 

Six  Reorganizations  before  1893 

Atchison,  '89      39.0  17.3  34.9 

Atchison,  '92  38.7  3.9  31.0 

Erie,  '75  13.4  .5  n.o 

Reading,  '80  15.9  98.1  49.1 

Reading,  '83       13.3  .6  7.9 

Rk.  I,  '80  11.9  25.2  16.3 

Average 
decrease  i.o  9.9  5.3 

One  Reorganization,  1902 
Rk.  I.  '02          139.0  29.0  H9-31 

It  appears  that  while  the  decrease  in  rentals  was  of  little  import  - 

1  The  figure  for  the  Reading  in  1880  is  affected  by  the  lease  of  the  Central  of  New 
Jersey,  which  took  place  simultaneously  with  the  reorganization.  Excluding  the 
increase  in  rentals,  the  remaining  increase  in  fixed  charges  amounted  to  only  9.5 
per  cent.  The  East  Tennessee  reported  no  rentals  in  either  1885  or  in  1887.  The 
data  for  the  Southern  Railway  are  not  in  such  shape  that  rentals  and  interest  can  be 
compared.  Its  reorganization  reduced  rentals,  however,  very  greatly. 


CONCLUSION  371 

ance  in  the  six  reorganizations  before  1893,  it  was  of  great  import- 
ance in  the  reorganizations  from  1893  to  1898.  Whereas  absolute 
interest  charges  were  reduced  by  none  of  the  later  reorganizations  by 
over  40  per  cent,  four  of  the  railroads  cut  rentals  by  over  60  per  cent, 
and  two  others  might  have  shown  a  similar  result  if  a  satisfactory 
division  between  interest  and  rentals  could  have  been  made.  Unfor- 
tunately, both  these  statistics  and  Meade's  statement  are  open  to 
criticism  for  the  reason  which  Meade  recognized  but  to  which  he  did 
not  give  sufficient  weight.  The  relative  amounts  of  interest  and  of 
rental  paid  by  a  railroad  at  any  time  represent  the  method  by  which 
its  system  is  held  together.  If  a  parent  company  raises  money  by  the 
sale  of  bonds,  and  purchases  its  branches  outright,  or  buys  a  majority 
of  their  shares,  its  interest  charges  will  be  large  and  its  rentals  small ; 
if  it  leases  these  same  lines  its  interest  payments  will  be  small  and  its 
rentals  large.  A  steady  movement  in  the  direction  of  consolidation 
doubtless  existed  before  1893,  but  this  movement  was  certainly 
accelerated  by,  and  made  a  prominent  feature  of  many  of  the  reor- 
ganizations of  the  following  five  years.  Thus  the  Northern  Pacific  in 
1893  reported  a  total  length  of  line  of  5431.92  miles ;  of  which  leased 
lines  and  lines  operated  under  contract  constituted  1912.92.  In 
1898,  after  reorganization  and  surrender  of  the  Wisconsin  Central, 
it  reported  4524.45  miles  owned  and  operated,  of  which  2430.42  con- 
sisted of  main  line,  and  2030.82  of  branch  lines  owned.  The  Erie  in 
1893  reported  551.12  miles  leased  and  598.51  operated  for  32  per 
cent  out  of  a  total  of  1 970.32. 1  Four  years  later  it  either  owned  out- 
right or  held  a  majority  of  the  stock  of  1806.92  miles  out  of  a  total  of 
2162.81.  The  Baltimore  &  Ohio  operated  26.5  per  cent  of  its  mile- 
age in  1897  under  lease  or  contract,  but  had  reduced  this  by  1899  to 
.5  per  cent.  The  Southern  Railway  proportion  was  38.1  per  cent 
in  1892  and  28.4  per  cent  in  1895.  A  reduction  in  rentals  through 
reorganization  has  occurred,  but  a  reduction  due  nevertheless 
largely  to  consolidation  of  systems,  rather  than  to  revision  of  rental 
contracts. 

It  was  partly  because  of  the  difficulty  of  exact  statement  on  the 
subject  that  a  discussion  of  rentals  was  postponed  till  the  matter  of 

1  The  32  per  cent  paid  has  been  included  under  rentals. 


372  RAILROAD  REORGANIZATION 

interest  should  have  been  considered.  It  now  appears  that  the  reduc- 
tion in  interest  payments  which  was  so  prominent  took  place  in  spite 
of  a  reduction  in  rentals.  If,  for  instance,  the  annual  interest  charges 
fell  $10,261,369  in  the  course  of  all  reorganizations,  and  if  in  later 
years  the  interest  figures  represented  charges  which  at  earlier  date 
appeared  as  rentals,  then  the  real  reduction  in  interest  was  greater 
than  the  figures  show.  It  is  true  that  consolidation  is  not  responsible 
for  all  of  that  decline  in  rentals  which  has  occurred.  It  is  as  open 
to  a  reorganizing  railroad  to  continue  old  leases  at  easier  terms  as  it 
is  to  absorb  the  leased  roads  into  its  system ;  and  much  of  this  has 
been  done.  The  East  Tennessee,  Virginia  &  Georgia,  for  instance, 
leased  the  Memphis  &  Charleston  in  1877  for  a  yearly  payment  of 
$297,750;  while  the  Southern  Railway  Security  Company  a  few 
years  before  had  agreed  to  pay  $318,763.50  annually  for  the  same 
property.  And  it  is  a  fact  that  both  consolidation  and  direct  agree- 
ment have  been  the  occasion  of  considerable  reductions  in  the  pay- 
ments for  the  control  of  subsidiary  lines.  There  is  no  reason  why 
leased  lines  which  have  not  earned  their  rentals  should  not  suffer 
as  much  as  portions  of  the  main  system  which  have  not  earned 
interest  on  their  bonds.  On  the  whole,  then,  rentals  have  decreased, 
both  by  means  of  direct  negotiation  and  through  an  absorption 
of  leased  roads  into  the  main  system  accomplished  by  exchange  of 
new  securities  for  old.  The  significance  of  precise  figures  must 
not  be  exaggerated.  The  losses  which  have  occurred  have  been 
distributed  according  to  the  same  principles  which  have  already 
been  detailed. 

It  is  now  clear  that  creditors,  stockholders,  and  syndicate  in  prac- 
tically all  successful  reorganizations  agree  that  cash  must  be  raised, 
fixed  charges  reduced,  and  the  losses  distributed  according  to  the 
seniority  of  existing  claims;  and  that  of  all  methods  the  compre- 
hensive exchange  of  new  securities  for  old  is  best  suited  to  accom- 
plish at  least  the  last  two  of  these  necessities.  To  give  a  compre- 
hensive view  of  the  operations  the  capitalization  after  reorganiza- 
tion of  the  roads  which  have  been  studied  may  be  compared  with 
the  capitalization  before.  It  will  then  be  possible  to  see  at  a  glance 
the  consequences  of  the  great  variety  of  exchanges.  The  following 
table  gives  the  percentages  which  the  stock  and  bonds  of  these 


CONCLUSION 


373 


companies  bear  before  and  after  reorganization  to  the  total  capital- 
ization before. 

CAPITALIZATION 

Seven  Reorganizations,  1893-8 


Before 

After 

Preferred 

Common 

Preferred 

Common 

Bonds 

Stock 

Stock 

Total 

Bonds 

Stock 

Stock 

Total 

Atchison 

69.2 

30-7 

IOO 

48.9 

39-6 

30-7 

119.2 

B.&O. 

72.9 

4-5 

22.5 

IOO 

121.3 

35-4 

31.6 

188.3 

Erie 

58-4 

4.1 

37-4 

IOO 

59-o 

22.1 

48.1 

129.2 

N.  Pac. 

61.0 

16.5 

22.4 

IOO 

71.3 

34-2 

36.5 

142.0 

Reading 

80.3 

19.6 

IOO 

61.2 

33-2 

332 

127.6 

Southern 

52.5 

8.8 

38.6 

IOO 

43-8 

23-5 

59-8 

127.1 

U.  Pac. 

40.9 

27-31 

3J-7 

IOO 

5Q-4 

45-7 

39-i 

135-2 

Average 

65.8 

4-6 

29-5 

IOO 

59-i 

33-6 

39-2 

132.0 

Seven  Reorganizations  be/  ore  1893 


Atchison, 

'89 

67.7                    31.8 

IOO 

95-6 

31.8 

127.4 

Atchison, 

'92 

68.8                    31.1 

IOO 

70.2 

31.1 

101.3 

E.  Tenn. 

'86 

48 

,2        19.2 

31.9 

IOO 

22.1 

34-2 

31.9 

88.2 

Erie,  '75 

38 

•5 

61.4 

IOO 

47-4 

60.5 

107.9 

Reading, 

'80 

69 

,i        1.3 

29-5 

IOO 

86.3 

1-3 

29.6 

117.2 

Reading, 

'83 

7i 

9          -4 

27.6 

IOO 

100.4 

27.6 

137-7 

Rk.  I.  '80 

32 

2 

677 

IOO 

40-3 

135-4 

175-7 

62.5 


Rk.  I.  '02        54.2 


35-7 


IOO 


73-9       2.8         37.6 


114.4 


One  Reorganization,  1902 

45.7         loo          55.7     40.0 


57-2        152.9 


The  most  striking  fact  is  that  every  reorganization  but  one  has 
occasioned  an  increase  in  total  capitalization.2  The  increase  varies 
from  1.3  per  cent  for  the  Atchison  in  1892  to  88.3  per  cent  for  the 
Baltimore  &  Ohio  in  1898;  and  the  average  increase  is  32  per  cent 
for  the  later  period  and  14.4  per  cent  for  the  earlier.  This  reflects  the 
exchange  of  new  securities  on  which  a  lower  rate  of  interest  is  pay- 
able with  securities  on  which  all  payments  are  optional,  for  old 

1  Government  Debt. 

3  In  considering  the  capitalization  of  the  Erie  before  and  after  the  reorganiza- 
tion of  1895  the  securities  of  the  New  York,  Pennsylvania  &  Ohio  have  been  ex- 
cluded. 


374  RAILROAD  REORGANIZATION 

securities  which  claim  a  high  annual  return.  It  is  the  result  of  the 
attempt  to  reduce  the  demands  upon  reorganized  corporations  with- 
out materially  reducing  the  sums  which  old  securityholders  may  in 
times  of  prosperity  receive.  It  reflects  also,  however,  the  sale  of  secur- 
ities for  ready  cash,  or  the  exchange  of  these  for  assessments,  as  well 
as  the  investment  of  minor  sums  in  the  improvement  of  the  roads.  A 
closer  examination  of  the  table  shows  that  the  increase  comes  chiefly 
in  bonds  before  1893  and  in  stock  after  that  date.  The  average 
increase  in  bonds  of  the  seven  reorganizations  before  1893  was  11.4 
per  cent  and  of  common  stock  .9  per  cent ;  whereas  bonds  decreased 
between  the  reorganizations  of  1893-8  from  65.8  per  cent  to  59.1 
per  cent  of  the  previous  capitalization,  although  common  stock 
increased  9.2  per  cent  and  there  was  introduced  a  great  volume  of 
preferred  stock  which  is  scarcely  found  at  all  before.  The  less  radical 
nature  of  the  early  reorganizations  and  the  use  of  income  bonds 
instead  of  preferred  stock  as  a  security  with  optional  interest  are  here 
apparent.  In  brief,  the  statement  of  capitalization  before  and  after 
reorganization  summarizes  and  confirms  the  conclusions  which  we 
have  reached.  A  few  fundamental  principles  have  underlain  the  com- 
plicated details  of  the  exchanges  of  new  securities  for  old.  These 
principles  appear  when  the  reorganizations  are  examined  one  by  one, 
and  they  show  not  less  clearly  when  all  the  reorganizations  are  taken 
in  two  general  groups. 

Another  question  now  naturally  arises.  If  an  increased  capitaliza- 
tion has  been  obtained  without  an  increase  in  charges,  owing  to  the 
lowering  of  the  rates  of  bond  interest  and  to  the  liberal  use  of  stocks 
or  income  bonds,  what  has  been  the  effect  on  the  market  value  of  the 
securities  concerned  ?  Is  the  aggregate  value  of  the  new  securities 
less  or  greater  than  the  aggregate  value  of  the  securities  which  they 
have  replaced  ?  It  has  been  seen  that  taken  as  a  whole  less  annual 
payments  can  be  claimed  from  the  railroads  as  of  right.  Has  this  fact 
decreased  aggregate  quotations,  or  has  the  larger  volume  of  securities 
and  the  chance  for  dividends  over  and  above  the  minimum  interest, 
raised  such  quotations  higher  than  they  were  before  ?  The  following 
tables  compare  the  quotations  of  securities  disturbed  by  the  various 
reorganizations  one  year  before  the  failure  of  their  railroads,  with  the 
quotations  one  year  after  reorganization  of  the  new  securities  issued 


CONCLUSION  375 

to  exchange  for  them.  A  third  column  is  inserted  to  show  the  effects 
of  years  of  prosperity  upon  quotations  subsequent  to  reorganization. 

Seven  Reorganizations,  1893-8 


Lowest  quotation 

Lowest  quotation 

of  month  one 

of  month  one 

year  before 

year  after 

Lowest  quotation 

failure 

reorganization 

December,  IQO6 

Atchison 

$184,857,934 

$129,364,451 

$342,941,683 

B.  &O. 

26,955,000 

34,092,518 

45,634,437 

Erie 

67,190,748 

38,895,077 

82,230,457 

N.  Pac. 

157,555,214 

135,507,699 

289,557,415 

Reading 

88,940,250 

71,607,223 

179,190,107 

Southern 

45,653,414 

35,231,356 

71,411,937 

U.  Pac. 

83,241,672 

103,329,339 

187,596,748 

1654,394,232 

$548,027,663 

$1,198,562,784 

D.  16.2  per  cent     I.  83.1 

Four  Reorganizations  before  1893 

Atchison,  '89       $129,142,003  $113,993,417 

Atchison,  '92  35,100,000  42,600,000 

E.  Tenn.  '86  17,657,377  21,746,188 

Reading,  '83  39,061,531  48,664,864 

$220,860,911  $227,004,469 

I.  2.7  per  cent 

It  thus  appears  that  the  increased  volume  of  securities  of  the  reor- 
ganizations of  1893-8  sold  for  a  less  aggregate  price  than  did  the 
smaller  volume  which  it  replaced.  Whereas  the  disturbed  securities 
of  the  seven  roads  in  question,  multiplied  by  their  quotations  one 
year  before  reorganization,  give  a  product  of  $654,394,232,  the  new 
bonds  and  stock  given  for  the  disturbed  securities,  multiplied  by 
their  quotations  one  year  after  reorganization,  give  a  product  of 
$548,027,663.*  This  is  not  true  for  three  of  the  four  reorganizations 

1  The  difficulties  which  prevent  wider  extension  of  these  tables  consist  partly  in 
the  absence  of  quotations  for  certain  classes  of  bonds,  and  partly  in  the  lack  of  suffi- 
ciently detailed  and  precise  information  in  some  of  the  early  reorganization  plans. 
Thus  there  are  no  quotations  recorded  in  1874-5  for  the  2d  consols  and  convertible 
bonds  of  the  Erie  Railroad  which  were  disturbed  by  the  subsequent  reorganization ; 
and  no  detailed  figures  of  the  exchange  of  new  bonds  for  old  appear  in  the  reports 
of  the  reorganization  plans  of  the  Reading  in  1881-3,  an(l  °f  the  Northern  Pacific  in 
1875.  The  reorganization  of  the  Union  Pacific  and  of  the  Chicago,  Rock  Island  & 
Pacific  in  1880  did  not  disturb  the  bonds  outstanding. 


376  RAILROAD  REORGANIZATION 

before  1893,  and  it  is  not  true  for  the  reorganizations  of  the  Baltimore 
&  Ohio  and  of  the  Union  Pacific  in  the  later  period.  Individual 
causes  account  for  most  of  the  difference.  The  Reading  reorganiza- 
tion of  1 886-8  took  place  so  soon  after  the  previous  failure  that  our 
method  makes  it  necessary  to  take  the  quotations  of  securities 
"before  reorganization"  only  five  days  after  the  railroad  has  left 
receivers'  hands.  These  figures  are  therefore  unduly  depressed. 
The  Atchison  reorganization  of  1892  was  voluntary,  and  was  not 
caused  by  financial  difficulties.  The  reorganizations  of  the  Union 
Pacific  and  of  the  Reading  in  1897  and  1898  respectively  occurred 
later  than  most  of  the  other  reorganizations  and  benefited  from  the 
sharp  increase  in  stock  and  bond  quotations  which  began  in  1897. 
For  the  seven  reorganizations  of  1893-8,  to  repeat,  the  aggregate 
market  value  of  old  securities  before  reorganization  was  greater  than 
the  market  value  after  reorganization  of  the  new  securities  given  in 
exchange  for  them.  The  smallest  changes  took  place  in  the  senior 
securities.  In  the  case  of  the  Northern  Pacific  the  aggregate  value  of 
the  three  prior  mortgages  disturbed  increased  from  $85,498,685  one 
year  before  failure  to  $86,158,702  one  year  after  foreclosure;  while 
the  consolidated  or  blanket  mortgage  of  the  company  decreased  from 
$36,032,360  to  $29,235,111.  In  the  case  of  the  Reading  the  value  of 
the  general  mortgage  45  increased  from  $37,160,977  to  $37,383,503, 
while  the  first,  second,  and  third  income  bonds  decreased  from 
$32,353,497  to  $22,784,700.  The  reason  was  not  generally  a  smaller 
increase  in  volume,  but  the  fact  that  new  bonds  of  fairly  stable  value 
were  given  for  the  better  sorts  of  old  securities,  while  old  junior 
mortgages  were  apt  to  receive  new  income  bonds  or  preferred  stock, 
of  which  the  value  varied  within  wide  limits. 

The  wide  difference  in  the  nature  of  the  securities  of  the  different 
roads  forbids  any  attempt  at  precise  classification.  The  following 
divisions  may,  however,  be  made :  Three  of  the  reorganizations  from 
1893-8  retired  branch-line  bonds  for  which  quotations  are  obtainable, 
with  a  resultant  increase  in  value  for  the  issues  of  $3,256,127,  or  14.2 
per  cent.  Five  of  the  reorganizations  dealt  with  what  may  be  classed 
as  general  mortgage  bonds,  and  the  value  of  the  new  securities  given 
was  to  the  value  of  the  old  as  $182,160,406  to  $196,186,382,  or  a 
decrease  of  7.1  per  cent.  Three  of  the  reorganizations  retired  junior 


CONCLUSION  377 

bonds  other  than  income.  The  value  of  the  old  securities  was 
$47,874,648  and  that  of  the  new  $22,272,174,  or  a  decrease  of  53.6 
per  cent.  Four  of  the  reorganizations  retired  income  bonds.  The 
value  of  the  old  securities  was  $40,913,662,  the  value  of  the  new  was 
$28,177,721,  and  the  decrease  was  31.1  per  cent.  Three  of  the  reor- 
ganizations retired  old  preferred  stock,  and  reduced  the  aggregate 
market  value  from  $36,509,662  to  $13,825,138,  or  62.1  per  cent. 
Finally,  the  common  stock  decreased  21.3  per  cent  from  an  aggre- 
gate value  of  $125,160,409  to  one  of  $98,316,060.  Stated  in  tabular 
form  the  result  is  as  follows: 

Value 

Value  one  year  Per  Cent 

one  year  after  reorgani-  increase 

before  failure  zation  or  decrease 

Branch-line  bonds  $22,840,928  $26,097,055  I.    14.2 

General  mortgages  196,186,382  182,160,406  D.    7.1 

Junior  mortgages  47,874,648  22,272,174  D.  53.6 

Income  mortgages  40,913,662  28,177,721  D.  31.1 

Preferred  stock  36,509,662  13,825,138  D.  62.1 

Common  stock  125,160,409  98,316,060  D.  21.3 

This  makes  more  definite  the  conclusion  which  has  been  outlined 
in  general  terms  before.  The  burden  of  the  reorganizations  from 
1893-8  fell  on  the  junior  securities  and  stockholders.  The  holders 
of  prior  lien  bonds  actually  had  more  value  than  before, one  year  only 
after  reorganization  had  taken  place;  the  general  rnortgage  bond- 
holders had  nearly  recouped  their  losses;  while  the  former  position 
of  the  other  creditors  and  of  the  stockholders  was  far  from  being 
regained. 

It  may  be  objected  that  the  decreases  in  market  quotations  were 
due  to  a  general  decline  in  prices  of  securities  and  not  to  reorganiza- 
tions of  the  roads  in  question.  This  objection,  however,  cannot  hold. 
It  is  true  that  a  general  decline  began  in.  the  United  States  in  Febru- 
ary, 1893,  and  continued  through  1894,  reaching  its  lowest  point  in 
August,  1893,  and,  after  that,  in  March,  1895 ;  and  that  this  decline 
was  due  to  general  conditions  of  panic  and  depression.  In  1895, 
however,  a  revival  took  place,  and,  proceeding  with  uncertain  steps 
through  1896,  became  obvious  and  important  in  1897  and  1898. 
The  average  date  of  failure  from  1893-8  of  the  seven  roads  de- 


378 


RAILROAD  REORGANIZATION 


scribed  in  the  text  was  October  i,  1893,  and  the  average  date  of 
reorganization  was  September  i,  1896.  Since  the  market  price 
figures  quoted  are  taken  one  year  before  failure  and  one  year  after 
reorganization,  conditions  in  October,  1892,  should  be  compared 
with  those  in  September,  1897.  The  following  diagram  traces  the 
movements  of  twenty-six  important  railroad  common  stocks  between 
those  dates.  Quotations  for  none  of  the  seven  railroads  in  question 
are  included.1 


1892 


1893 


1894 


1895 


1896 


1897 


120 
100 
80 

00 
40 
20 

A'  s-> 

,••"••      .,                                    ,'*"      A 

" 

It  is  evident  that  the  prices  of  the  above  stocks  were  not  materially 
lower  on  September  i,  1897,  than  on  October  i,  1892.  The  exact 
average  was  73  J  for  the  earlier  month,  and  71 J  for  the  later.  The 
comparison  may  fairly,  however,  be  carried  further  than  this,  and 
considerable  pains  have  been  taken  to  arrive  at  general  figures  which 
are  conclusive.  Such,  it  is  believed,  are  the  following.  The  market 
value  of  thirty-nine  different  bond  issues  of  seventeen  companies, 
taken  at  random  from  among  those  frequently  bought  and  sold  upon 
the  New  York  and  Philadelphia  exchanges,  was  in  October,  1892, 
$388,628,968.  This  differed  little  from  the  market  value  of  the  same 
securities  in  September,  1892,  which  was  $388,198,432,  or  that  in 
November,  1892,  which  was  $390,170,323.  The  market  value  of 
these  issues  in  1897  was  $371,125,135  in  August,  $373>875>293  in 

1  The  twenty -six  railroads  are  as  follows:  Canad.  Pac.;  Canad.  So.;  C.  &  O.; 
C,  B.  &Q.;C.  &E.  I.;  C.,  M.  &  St.  P.;C.  &  N.  W.;  C,  R.  I.  &  P.;  C.,  C,  C. 
&  St.  L. ;  D.,  L.  &  W. ;  111.  C. ;  L.  S.  &  M.  S. ;  L.  &  N. ;  Manh.  El. ;  Mich.  C. ;  M.,  K. 
&  T. ;  Mo.  Pac. ;  Mob.  &  O. ;  N.  Y.  C.  &  H.  R. ;  N.  Y.,  O.  &  W. ;  So.  Pac. ;  Wabash ; 
Tex.  &  P.;  C.  of.  N.  J.;  L.  E.  &  W.;  St.  P.,  M.  &  M. 


CONCLUSION  379 

September,  and  $372,962,239  in  October.   Represented  in  tabular 
form  the  situation  appears  as  follows : 

Market  Value  of  Securities 


September 
October 
November 

1892 

$388,198,432 
388,628,968 
390,170,323 

August 
September 
October 

1897 
$371,125,135 

373,875,293 
372,962,239 

Decrease 
4.4  per  cent 
3.7  per  cent 
4.4  per  cent 

In  other  words,  the  quotations  for  this  large  mass  of  representative 
securities  were  within  4^  per  cent  in  1897  of  what  they  were  in  1892. 
If  to  these  are  now  added  the  same  proportions  of  stock  that  existed 
for  the  disturbed  securities  of  the  seven  reorganizations  from  1893-8 
there  appears  the  following  result : 

Market  Value  of  Securities 

1892  1897                    Decrease 

September         $641,105,160  August  $620,794,202  3.1  per  cent 

October               644,276,634  September  631,061,329  2.0  per  cent 

November           644,131,632  October  629,005,577  2.3  per  cent1 

This  is,  as  nearly  as  possible,  a  computation  comparable  with 
figures  already  cited.  It  is  made  up  the  same  way,  has  too  broad  a 
basis  to  give  a  non-typical  result,  and  is  not  dependent  upon  the 
selection  of  a  single  month  for  its  conclusion  that  security  prices  had 
nearly  regained  their  former  level  by  the  last  half  of  1897.  A  decrease 
in  value  of  16.2  per  cent  for  the  securities  of  seven  reorganized  rail- 
roads has  been  determined.  Less  than  one-fifth  of  this  can  be  attrib- 
uted to  general  causes.  The  significance  of  the  decrease  therefore 
remains. 

In  conclusion,  two  other  points  of  interest  may  be  mentioned. 
First,  the  provision  which  sound  reorganization  plans  should  make 
for  the  future  development  of  their  properties,  and  second,  the  crea- 
tion of  voting  trusts  to  prevent  sudden  changes  in  control.  It  has 
been  seen  that  restrictions  on  new  mortgages  have  accompanied  the 
issue  of  income  bonds  and  of  preferred  stock,  in  order  to  afford  to 

1  The  securities  in  the  table  are  taken  from  the  following  companies:  St.  P.,  M. 
&  M.;  Wabash;  N.  Y.  C;  C.,  B.  &  Q.;  C.,  M.  &  St.  P.;  L.  &  N.;  D.,  L.  &  W.; 
Penna.;  W.  U.  Tel.;  B.,  R.  &  P.;  Can.  So.;  Long  L;  P.  C.  C.  &  St.  L.;  Tex.  &  P.; 
C.  &N.  W.;  I.  C;  C.  &  E.  I. 


380  RAILROAD  REORGANIZATION 

these  latter  a  desirable  protection.  If  old  bondholders  demand  these 
clauses,  a  certain  amount  of  new  issues  is  required  by  the  interests  of 
the  corporation.  A  railroad  is  never  finished.  New  extensions  and 
improvements  which  shall  increase  earnings  are  generally  called  for 
to  a  degree  which  current  earnings  are  insufficient  to  meet.  Some 
provision  for  regular  increments  of  new  capital,  without  the  need  of 
stockholders'  approval  in  each  case,  is  highly  advisable,  and  implies 
no  lack  of  conservatism.  In  fact,  some  such  provision  is  often  forced 
upon  a  railroad.  Take  the  case  of  the  successive  reorganizations  of 
the  Atchison  properties.  In  1889  no  new  bonds  were  to  be  allowed  to 
be  inserted  between  the  income  and  the  mortgage  issues,  but  it  was 
left  optional  with  the  management  to  deduct  all  improvements  before 
estimating  the  earnings  applicable  to  dividends  on  the  former  bonds. 
This  proved  quite  inadequate,  and  the  reorganization  of  1892  pro- 
vided definitely  a  fund  of  $20,000,000  second  mortgage  bonds,  which 
were  to  be  issued  to  a  limit  of  $5,000,000  each  year,  for  specific  im- 
provements on  the  Atchison,  exclusive  of  the  Colorado  Midland  and 
the  St.  Louis  &  San  Francisco.  The  right  was  reserved  to  the  com- 
pany, when  all  the  above  should  have  been  used  up,  to  issue  more 
bonds  of  the  same  sort  for  the  same  purpose,  and  on  the  same  mileage 
up  to  a  limit  of  $50,000,000.  Finally,  in  1895,  there  were  reserved 
$30,000,000  general  first  mortgage  bonds,  to  be  issued  each  year  to  a 
limit  of  $3,000,000,  and  $20,000,000  adjustment  bonds,  to  be  issued 
each  year  to  a  limit  of  $2,000,000,  after  the  general  mortgage  fund 
should  have  been  exhausted.  In  each  of  the  reorganizations  in  the 
nineties  considered  in  this  study,  in  which  restrictions  on  new  bond 
issues  were  imposed,  there  was  concomitant  provision  for  regular 
increments  of  mortgage  bonds  to  be  used  for  improvements,  better- 
ments, and  new  construction.  Thus  the  Baltimore  &  Ohio  in  1898 
reserved  $5,000,000  prior  liens  and  $27,000,000  general  mortgage 
bonds,  of  which  the  latter  were  to  be  issued  at  the  rate  of  not  exceed- 
ing $1,500,000  for  the  first  four  years  after  the  organization  of  the 
new  company,  and  not  exceeding  $1,000,000  a  year  thereafter;  and 
the  former  were  to  be  put  forth  at  the  rate  of  not  exceeding  $1,000,000 
a  year  after  January  i,  1892,  for  enlargements,  betterments,  and 
extensions.  The  Erie  in  1895  provided  $5,337,208  in  cash  to  be  spent 
at  once,  and  $17,000,000  in  general  lien  bonds  to  be  issued  during  the 


CONCLUSION  381 

years  following  the  reorganization.  The  Northern  Pacific  in  1896  set 
aside  $25,000,000  prior  lien  bonds,  of  which  not  more  than  $1,500,000 
were  to  be  issued  in  any  one  year,  and  $4,000,000  general  lien  bonds, 
presumably  to  be  used  as  needed.  The  Reading  in  1895  reserved 
$20,000,000  general  mortgage  bonds  for  new  construction,  additions, 
and  betterments,  of  which  not  over  $1,500,000  were  to  be  used  in  any 
one  year.  And,  finally,  the  Richmond  Terminal  reserved  $20,000,000 
in  5  per  cent  bonds  to  be  used  at  the  rate  of  $2,000,000  per  year,  and 
has  recently  authorized  a  $200,000,000  4  per  cent  mortgage  which 
will  raise  the  yearly  limit  of  expenditure  to  $5,000,000. l 

Before  the  nineties,  as  after,  provision  for  new  capital  accompanied 
restriction  on  the  future  issue  of  bonds.  In  1886  the  Reading  pro- 
vided a  lump  sum  of  $9,792,000  general  mortgage  bonds  for  future 
use  in  the  improvement  of  the  railroad;  and  in  1875  the  Northern 
Pacific  contemplated  the  issue  of  first  mortgage  bonds  to  an  average 
of  $25,000  per  mile  of  new  road  actually  completed.  Where,  as  with 
the  Atchison  in  1889,  some  such  provision  did  not  accompany  the 
general  restrictions  placed  upon  new  bond  issues,  or  where,  as  with 
the  Northern  Pacific  in  1875,  the  provision  proved  inadequate,  fresh 
measures  of  relief  were  compelled.  The  Atchison  reorganization  of 
1892  has  been  mentioned ;  in  1889  a  financial  operation  of  the  North- 
ern Pacific,  which  according  to  our  definition  was  not  properly  a 
reorganization,  provided  $20,000,000  5  per  cent  consolidated  mort- 
gage bonds  for  additional  branches  at  a  rate  not  to  exceed  $30,000 
per  mile,  and  a  like  sum  for  betterments,  etc. 

Even  where  no  restrictions  on  future  bond  issues  are  imposed,  it  is 
highly  advisable  that  some  provision  for  future  capital  requirements 
be  made,  and  that  the  management  have  at  its  disposal  a  fund  of 
bonds  issuable  without  the  approval  of  stockholders  in  each  case.  It 
is  probable,  therefore,  that  some  such  provision  would  have  been  a 
feature  of  some,  at  least,  of  the  reorganizations  even  had  the  restric- 
tions described  not  made  the  clauses  an  imperative  necessity ;  but  i£ 
we  may  judge  from  the  rather  restricted  basis  on  which  we  are  here 
at  work,  the  provisions  would  have  been  far  less  liberal  than  we  have 
found  to  be  the  case.  In  1895  the  Union  Pacific  set  aside  $13,000,000 
4  per  cent  bonds  and  $7,000,000  preferred  stock  to  dispose  of  equip- 

1  See  Annual  Report  for  1906. 


382  RAILROAD  REORGANIZATION 

ment  obligations,  and  for  reorganization  and  corporate  uses.  Of 
these,  corporate  uses  were  stated  to  be  those  which  would  be  proper 
to  the  corporation  thereafter,  such  as  the  issue  of  securities  in  exten- 
sion of  the  property.  This,  of  course,  was  quite  inadequate.  Similarly 
the  Rock  Island  in  1902  and  the  Erie  in  1875-7  provided  for  a  certain 
issue  of  stock  or  bonds  to  be  applied  to  future  capital  requirements. 
It  is  undoubtedly  true  that  both  the  Erie  and  the  Reading  railroads 
were  hampered  by  the  lack  of  adequate  provision  of  this  nature; 
though  as  the  main  difficulty  of  each  corporation  was  the  continued 
existence  of  heavier  charges  than  it  could  bear,  an  automatic  in- 
crease of  indebtedness  would  not  have  proved  a  solution  of  their 
troubles. 

The  essence  of  a  voting  trust  is  the  deposit  of  stock  in  the  hands 
of  trustees  (most  frequently  five  in  number).  These  trustees  issue 
certificates  in  return.  All  dividends  declared  on  the  stock  are  paid 
over  to  holders  of  certificates,  but  all  the  voting  power  is  exercised  by 
the  trustees  so  long  as  the  trust  endures.  Of  the  reorganizations  which 
we  have  described,  ten  reorganizations  with  foreclosure  included  five 
voting  trusts  and  one  proxy  committee ;  eight  reorganizations  with- 
out foreclosure  included  two  voting  trusts ;  ten  reorganizations  before 
1 893  included  two  voting  trusts  (though  a  third  was  proposed  for  the 
Atchison  in  1889) ;  seven  reorganizations  in  1893-8  included  five 
voting  trusts  and  one  proxy  committee.  The  use  of  voting  trusts  has 
therefore  become  more  general,  denoting  a  realization  of  the  dangers 
of  fluctuating  and  speculative  control  at  critical  periods  in  a  railroad's 
history.  This  desire  to  secure  conditions  of  stable  control  has  been 
the  dominant  one  in  the  cases  under  consideration.  "In  order  to 
establish  such  control  of  the  reorganized  company  for  a  series  of 
years,"  said  the  reorganization  plan  of  the  Baltimore  &  Ohio  in 
1898,  "both  classes  of  stock  of  the  new  company  shall  be  vested  in 
.  .  .  five  voting  trustees."  "The  importance  of  vesting  in  the 
present  creditor  class  the  management  of  the  properties  until  their 
productiveness  is  considerably  increased  ...  is  manifest,"  said  the 
syndicate  reorganization  plan  of  the  Reading  in  1886.  It  is  of  su- 
preme importance  that  a  reorganized  company  be  well  started  on  its 
way  by  men  who  have  an  interest  in  making  the  reorganization  plan 
permanently  successful,  and  that  conservative  direction  be  assured 


CONCLUSION  383 

until  danger  of  bankruptcy  be  past.  For  this  reason  we  should 
expect  the  use  of  voting  trusts  to  increase  in  direct  relation  to  the  seri- 
ousness of  the  difficulties  experienced,  and  to  the  vividness  with 
which  the  need  for  stability  is  felt.  If  we  may  generalize,  and  say  that 
a  railroad  which  cannot  be  reorganized  without  a  foreclosure  sale  is 
usually  in  more  desperate  straits  than  one  which  can  be  saved  by 
voluntary  concessions,  we  have  an  explanation  of  the  coincidence  of 
foreclosures  and  voting  trusts.  The  teachings  of  experience,  which 
have  shown  both  the  usefulness  of  voting  trusts  as  tools,  and  the 
necessity  of  a  solution  such  as  they  offer,  further  explain  the  in- 
creased prominence  of  the  trust  in  later  years. 

It  is  not  true  that  voting  trusts  are  always  used  for  the  purposes 
indicated.  In  1892  certain  stockholders  of  the  Baltimore  &  Ohio 
agreed  to  deposit  their  certificates  in  a  trust  for  one  year  and  five 
months.  The  stock  deposited  amounted  to  $8,975,000  out  of  a  total 
outstanding  of  $25,000,000,  and  a  limit  of  $11,000,000  was  set  to  the 
amount  to  be  so  placed,  the  object  of  the  arrangement  apparently 
being  to  increase  the  influence  of  the  stockholders  concerned  by  con- 
centration of  their  holdings.1  Again,  in  1895,  to  take  an  outside  exam- 
ple, the  stock  of  the  Oregon  Railway  &  Navigation  Company  was 
placed  in  trust  with  the  Central  Trust  Company  in  order  better  to 
protect  the  preferred  stock.  It  was  provided  that  during  the  continu- 
ance of  the  trust  the  Central  Trust  Company  should  vote  all  the 
stock :  first,  against  any  increase  in  the  preferred  stock  unless  the 
holders  of  all  the  voting  trust  certificates  of  both  classes  should  give 
their  unanimous  consent  at  general  meetings;  second,  against  all 
propositions  relating  to  the  mortgaging,  selling,  or  leasing  of  the  rail- 
road and  telegraph  lines  of  the  company,  or  to  the  consolidation 
thereof,  unless  a  majority  of  each  class  of  certificates  should  consent ; 
third,  on  all  other  questions  as  directed  by  the  holders  of  a  majority 
of  the  aggregate  of  all  voting  trust  certificates  of  both  classes  repre- 
sented at  general  meetings.2  Further  provisions  gave  to  the  preferred 
stock  control  of  a  majority  of  the  board  of  directors.  These  instances 
are  of  interest;  but  the  principal  purpose  of  the  voting  trusts  in 
the  reorganizations  which  we  have  considered  has  been  nevertheless 
the  securing  of  stability  of  control  for  a  definite  period  after  the 
rehabilitation  of  the  bankrupt  companies. 

1  Chron.  54:  369,  1892.       1  Investors'  Supplement,  April,  1897;  Chron.  62:  41. 


384  RAILROAD  REORGANIZATION 

The  duration  of  the  voting  trust  varies  from  company  to  company. 
The  most  usual  provision  is  for  five  years.  Frequently  the  voting 
trustees  may  terminate  the  trust  earlier  at  their  discretion,  as  in  the 
case  of  the  Baltimore  &  Ohio  trust  of  1898,  the  Richmond  Terminal 
trust  of  1894,  or  the  Northern  Pacific  trust  of  1896.  Frequently,  also, 
certain  conditions  must  be  fulfilled  before  termination.  In  the  case 
of  the  Erie  in  1895  no  stock  certificates  were  to  be  due  or  deliverable 
before  December  i,  1900,  nor  until  the  expiration  of  such  further 
period,  if  any,  as  should  elapse  before  the  Erie  Railroad  Company  in 
one  year  should  have  paid  4  per  cent  cash  dividend  on  the  first  pre- 
ferred stock.1  In  the  case  of  the  Reading  in  1896  4  per  cent  cash 
dividends  on  the  first  preferred  stock  were  required  for  two  consecu- 
tive years,  and  this  delayed  dissolution  three  years  beyond  the  time 
originally  contemplated.2  The  Richmond  Terminal  trust  had  pro- 
visions similar  to  those  of  the  Erie. 

The  number  of  trustees  also  varies.  The  scheme  proposed  for  the 
Atchison  in  1889  contemplated  a  trust  of  seven;  the  Baltimore  & 
Ohio  in  1898  and  the  Richmond  Terminal  in  1894  provided  for  five ; 
and  the  Erie  in  1896  for  three ;  but  this  point  is  not  material.  When 
the  reorganization  plan  requires  the  consent  of  stockholders  to  an 
increase  in  the  issue  of  securities  the  consent  of  holders  of  trust  certi- 
ficates is  apt  to  be  required  on  similar  occasions  during  the  existence 
of  the  trust.  Thus  the  Northern  Pacific  agreement  of  1896  forbade 
the  trustees  to  increase  the  preferred  stock  or  to  issue  any  new  mort- 
gage, except  with  the  consent  of  the  holders  of  a  majority  of  the  whole 
amount  of  preferred  stock  trust  certificates,  and  of  the  holders  of  a 
majority  of  the  common  stock  trust  certificates  represented  at  the 
meeting. 

This  ends  the  present  treatment  of  the  subject  of  railroad  reor- 
ganization. The  results  of  the  discussion  may  be  briefly  summed  up 
as  follows: 

First.  Reorganization  is  most  frequently  an  attempt  to  extricate 
an  embarrassed  company  from  its  difficulties. 

Second.  These  difficulties  can  generally  be  traced  either  to  an 
unrestricted  freedom  of  capitalization,  or  to  destructive  competition. 

Third.  The  shape  in  which  trouble  appears  is  likely  to  be  that  of 

1  Chron.  Investors'  Supplement,  April,  1897.  2  Chron.  79:2087,  1904. 


CONCLUSION  385 

a  large  floating  debt  or  of  excessive  fixed  charges ;  either  or  both  of 
which  may  have  brought  the  corporation  to  a  critical  condition  some 
time  before  the  actual  collapse. 

Fourth.  The  best  practice  favors  the  retirement  of  floating  debt 
by  assessments  on  securityholders,  though  sales  of  securities  are 
sometimes  resorted  to,  or  a  combination  of  sales  and  assessments  is 
employed. 

Fifth.  Fixed  charges  are  composed  chiefly  of  interest  and  rentals. 
Interest  payments  are  reduced  by  the  retirement  of  outstanding  bonds 
by  new  bonds  which  bear  a  lower  rate  of  interest,  or  by  income  bonds 
or  stock,  or  by  a  combination  of  securities  with  a  fixed  rate  of  interest 
with  securities  upon  which  payment  of  interest  is  optional.  Rentals 
may  be  reduced  by  direct  negotiation,  or  the  leased  roads  may  be 
absorbed  into  the  main  system,  and  their  securityholders  receive 
new  stocks  and  bonds  as  above. 

Sixth.  The  new  bonds  are  of  fewer  kinds  and  have  longer  terms  to 
run  than  the  bonds  which  they  displace. 

Seventh.  This  reduction  in  fixed  charges  imposes  a  loss  on  the 
greater  part  of  securityholders,  both  in  respect  to  the  annual  interest 
which  they  can  claim,  and  in  respect  to  the  selling  price  of  their  hold- 
ings. A  similar  loss  is  suffered  by  those  securityholders  who  pay  the 
required  assessments. 

Eighth.  The  loss  falls  on  securityholders  according  to  the  seniority 
of  their  holdings,  —  those  bonds  escaping  which  can  expect  to  satisfy 
their  claims  from  the  selling  price  of  the  railroad  at  foreclosure  sale. 

Ninth.  The  most  important  development  in  reorganization  prac- 
tice has  been  the  increasing  use  of  new_securities  bearing  a  fixed  rate 
of  interest  withjiew  securities  bearing  a  conditional  rate  of  interest ; 
a  use  which  may  make  the  losses  of  junior  securityholders  temporary 
instead  of  permanent,  and  yet  safeguard  the  interests  of  the  corpora- 
tion. In  this  connection  preferred  stock  has  gained  in  popularity 
over  income  bonds. 

Tenth.  This  development,  and  the  issue  of  new  securities  for 
floating  debt  and  for  other  purposes,  have  caused  the  capitalization 
after  reorganization  in  all  but  one  of  the  cases  which  we  have  exam- 
ined to  exceed  the  capitalization  before. 

Eleventh.  In  order  to  perfect  a  reorganization  additional  provisions 


386  RAILROAD  REORGANIZATION 

are  often  inserted,  which  protect  junior  securityholders  against  the 
reckless  issue  of  new  bonds,  supply  the  corporation  with  ability  to 
make  necessary  betterments  from  capital  account,  protect  the  cor- 
poration from  sudden  changes  in  control,  and  similarly  supplement 
the  main  clauses. 


BIBLIOGRAPHICAL   NOTE 


BIBLIOGRAPHICAL  NOTE 

INFORMATION  about  railroad  reorganization  must  be  gathered  from 
a  wide  variety  of  sources.  The  most  important  are  five  in  number. 
First,  there  are  the  annual  reports  of  the  railroads  themselves. 
Second,  there  are  the  files  of  financial  and  railroad  papers.  Third, 
there  are  contemporaneous  pamphlets.  Fourth,  there  are  memoirs 
and  biographies  containing  first-hand  material.  And  fifth,  there  are 
government  documents,  which  comprise  (i)  regular  reports  by  and 
testimony  before  bodies  like  the  state  and  national  railway  com- 
missions; (2)  reports  by  and  testimony  taken  before  occasional 
committees;  (3)  legislative  records;  (4)  state  and  federal  court 
proceedings. 

Of  the  five  sources  mentioned,  the  files  of  contemporary  papers 
are  the  most  useful.  The  Commercial  and  Financial  Chronicle,  the 
Railroad  Gazette,  the  Railway  Age,  the  Railway  and  Engineering 
Review,  the  Railway  Times  of  London,  the  New  York  Tribune, 
the  New  York  Journal  oj  Commerce,  the  Wall  Street  Journal,  and 
many  others  are  generally  accurate  and  trustworthy,  though  it 
should  be  noted  as  a  limitation  that  they  seldom  have  inside  informa- 
tion, and  that  their  comment  is  not  always  independent.  These 
papers  are  supplemented  by  pamphlets  and  circulars.  Many 
reorganization  plans  are  published  in  pamphlet  form.  Opposition 
to  them  is  not  infrequently  thrown  into  the  same  shape.  Reports 
of  experts  are  printed  in  pamphlets.  In  general,  the  live  literature  of 
reorganization  must  be  put  out  on  short  notice,  and  so  is  issued  in 
this  informal  way.  The  official  statistics  of  railroads  are  to  be  found 
in  the  reports  of  the  railroad  companies  themselves,  made  to  stock- 
holders or  to  supervisory  government  bodies.  These  statistics,  like 
the  news  items  in  the  financial  and  railroad  papers,  must  be  used 
with  care.  They  are  sometimes  incomplete,  and  they  are  sometimes 
purposely  misleading.  Nevertheless,  they  are  useful,  and  serious  inac- 
curacies in  any  of  them  are  usually  exposed  within  a  few  years  after 
their  original  publication.  The  material  to  be  found  in  legislative 
records  is  not  abundant.  Railroads  almost  invariably,  however,  ap- 
pear before  the  courts  in  the  course  of  their  reorganizations,  and  in 


390  BIBLIOGRAPHICAL  NOTE 

the  decisions  of  these  tribunals  some  facts  of  interest  may  be  found. 
The  records  of  the  receivership  of  the  Union  Pacific  have  been  pub- 
lished in  fourteen  volumes.  The  decision  of  the  United  States 
Supreme  Court  in  Pearsall  vs.  Great  Northern  l  blocked  the  first 
of  the  reorganization  plans  proposed  for  the  Northern  Pacific  in 
1895.  An  earlier  decision  2  enabled  the  Union  Pacific  to  postpone 
the  payment  of  interest  upon  the  public  debt  until  the  principal 
should  have  fallen  due.  The  Erie  has  been  at  times  almost  con- 
tinuously before  the  courts,  and  the  same  is  true  of  the  Reading 
during  its  reorganizations,  of  the  Northern  Pacific,  and  of  other 
roads.  The  student  is  most  fortunate  when  he  can  uncover  testimony 
before  government  committees,  of  men  who  have  taken  part  in  re- 
organization proceedings,  or  who  are  personally  acquainted  with 
developments  which  have  led  up  to  railroad  failures.  Mr.  Blanchard, 
before  the  Hepburn  Committee,3  and  Mr.  Fink,  before  the  Hepburn 
and  the  Cullom  Committees,4  helped  their  hearers  to  understand 
the  policy  which  finally  resulted  in  the  failure  of  the  Baltimore  & 
Ohio.  The  report  of  the  Poland  Committee  disclosed  the  scandal 
of  the  Credit  Mobilier.5  The  testimony  of  Gould,  Adams,  Ames, 
Holmes,  and  others  before  the  United  States  Pacific  Railroad  Com- 
mission of  1887-8  8  made  clear  the  iniquity  of  the  Union  Pacific 
reorganization  of  1880.  The  statements  of  Mr.  Pierce  before  the 
Senate  Committee  on  Pacific  Railroads  in  1896 7  explained  the  atti- 
tude of  the  Union  Pacific  towards  the  repayment  of  that  company's 
debt  to  the  Government.  The  testimony  of  Messrs.  McLeod,  Rice, 
Harris,  and  others  before  the  Industrial  Commission  of  1900  threw 
much  light  upon  the  Reading  bankruptcy  of  1893.  The  arguments 
of  counsel  in  the  matter  of  export  differentials,  reprinted  in  the  fifth 
volume  of  the  Elkins  Committee  report,8  gave  valuable  information 
on  the  subject  of  trunk-line  competition.  Many  of  the  witnesses 
before  these  committees  are  frank  in  criticism  of  the  railroads  with 
which  they  have  been  connected.  Others  are  forced  to  admissions 

161  U.  S.  647.  2  138  U.  S.  84. 

New  York,  1879.  4  4Qth  Congress,  ist  Session,  Senate  Report,  No.  42. 

42d  Congress,  3d  Session,  House  Reports,  No.  77. 
5oth  Congress,  ist  Session,  Senate  Executive  Document  No.  51. 
54th  Congress,  ist  Session,  Senate  Document  No.  314. 

58th  Congress,  3d  Session,  hearings  before  the  Committee  on  Interstate  Com- 
merce, United  States  Senate,  in  Special  Session,  1905. 


BIBLIOGRAPHICAL  NOTE  391 

by  the  keen  questioning  to  which  they  are  exposed.  The  only  simi- 
lar material  to  be  found  elsewhere  lies  in  memoirs,  such  as  those  of 
Henry  Villard,1  or  in  biographies  like  Oberholtzer's  Life  of  Jay 
Cooke  2  and  Pearson's  An  American  Railroad  Builder  3  which 
make  use  of  private  papers  of  men  prominent  in  railroad  finance. 
Perhaps  White's  Book  of  Daniel  Drew,4  Depew's  Retrospect  of 
Twenty-Five  Years,5  and  the  Life  of  Isaac  Ingalls  Stevens  by  his 
son,6  should  be  included  in  this  class. 

This  enumeration,  while  in  no  way  exhaustive,  indicates  the 
principal  sources  from  which  material  may  be  obtained.  Second- 
ary works  do  not  exist  which  treat  solely  of  railroad  reorganiza- 
tion. There  is  an  article  by  E.  S.  Meade  in  the  Annals  of  the 
American  Academy,7  articles  by  Simon  Sterne  in  the  Forum,8  and 
an  article  by  A.  Lansburgh  in  Die  Bank,9  but  no  books  of  which 
the  author  is  aware.  Mention  may  be  made  of  an  intelligent  dis- 
cussion of  an  industrial  reorganization  by  A.  S.  Dewing  in  the 
Quarterly  Journal  of  Economics.10  Poor's  Manual  for  1900  con- 
tains the  most  convenient  set  of  general  statistics.  On  railroad 
receiverships,  besides  legal  works,  there  is  a  monograph  by  H.  H. 
Swain,11  which  has  a  brief  bibliography,  and  articles  in  the  Forum, 
North  American  Review,  and  other  periodicals. 

On  the  history  of  the  great  American  railroad  systems  the  liter- 
ature is  also  quite  inadequate.  The  Union  Pacific  has  been  written 
up  frequently,  because  of  its  relations  with  the  United  States 

1  Memoirs  of  Henry  Villard,  1835-1900.   Boston,  1904. 

2  Ellis  Paxon  Oberholtzer,  Life  of  Jay  Cooke.  Philadelphia,  1907. 

8  H.  G.  Pearson,  An  American  Railroad  Builder.  John  Murray  Forbes.  Boston 
and  New  York,  1911. 

4  Bouck  White,  The  Book  of  Daniel  Drew.   New  York,  1910. 

6  C.  M.  Depew,  A  Retrospect  of  Twenty-five  Years  with  the  New  York  Central 
Railroad  and  its  Allied  Lines.  New  York,  1892. 

6  Hazard  Stevens,  The  Life  of  Isaac  Ingalls  Stevens  by  his  Son.   Boston,  1900. 

7  Annals  of  the  American  Academy  for  Political  and  Social  Science,  March,  1901. 

8  Forum,  September,  1890,  and  March,  1894. 

9  Die  Bank,  July,  1911. 

10  Quarterly  Journal  of  Economics,  November,  1911. 

11  H.  H.  Swain,  Economic  Aspects  of  Railroad  Receiverships,  Economic  Studies 
of  the  American  Economic  Association,  April,  1898. 


392  BIBLIOGRAPHICAL  NOTE 

Government.  Works  by  Davis,1  von  der  Leyen,2  Bromley,3  Dil- 
lon,4 Crawford,5  Hazard,6  and  White  7  treat  various  phases  of  the 
company's  development  up  to  its  final  reorganization,  an  article 
by  Meyer8  describes  the  settlements  between  the  Pacific  rail- 
roads and  the  Government,  and  another  article  by  Mitchell  in  the 
Quarterly  Journal  of  Economics 9  deals  with  Union  Pacific  finance 
since  that  time.  There  may  also  be  mentioned  an  account  by 
Bailey,10  which  covers  the  whole  of  the  road's  history,  but  in  a 
superficial  way,  and  a  vicious  attack  by  Robinson  upon  all  the  gov- 
ernment-aided lines.11  The  student  of  the  Erie  has  at  his  disposal 
the  elaborate  narrative  by  E.  H.  Mott,12  the  chapters  by  Charles 
Francis  Adams,  Jr.,13  and  the  sketch  by  Crouch.14  Milton Reizen- 
stein  has  dealt  with  the  progress  of  the  Baltimore  and  Ohio  up  to 
1853, 15  and  for  this  road  there  is  material  to  be  found  in  Smith's 
Book  of  the  Great  Railway  Celebrations  of  i857,16  and  in  a  com- 

I  John  P.  Davis,  History  of  the  Union  Pacific  Railroad.  Chicago,  1894. 

s  Alfred  von  der  Leyen,  Die  Finanz-  und  Verkehrspolitik  der  Nordamerikanischen 
Eisenbahnen,  2d  ed.,  Berlin,  1895. 
J  I.  H.  Bromley,  Pacific  Railroad  Legislation.  Boston,  1886. 

4  J.  F.  Dillon,  Pacific  Railroad  Laws.  New  York,  1890. 

5  J.  B.  Crawford,  The  Credit  Mobilier  of  America.  Boston,  1880. 

6  Rowland  Hazard,  The  Credit  Mobilier  of  America.  Providence,  1881. 

7  Henry  Kirke  White,  History  of  the  Union  Pacific  Railroad.    Economic  Studies 
of  the  University  of  Chicago,  1895. 

8  Hugo  R.  Meyer,  The  Settlements  with  the  Pacific  Railways.   Quarterly  Jour- 
nal of  Economics,  July,  1899. 

9  T.  W.  Mitchell,  The  Growth  of  the  Union  Pacific  and  its  Financial  Operations. 
Quarterly  Journal  of  Economics,  August,  1907. 

10  W.  F.  Bailey,  The  Story  of  the  First  Trans-Continental  Railroad,  its  Project- 
ors, Construction,  and  History.   Pittsburg,  1906. 

II  John  R.  Robinson,  The  Octopus.  A  History  of  the  Construction,  Conspiracies, 
Extortions,  Robberies,  and  Villainous  Acts  of  the  Central  Pacific,  the  Union  Pacific, 
and  Other  Subsidized  Railroads.  San  Francisco,  1894. 

"  E.H.iMott,  Between  the  Ocean  and  the  Lakes;  the  Story  of  Erie.  New  York,  1899. 

13  Charles  Francis  and  Henry  Adams,  Chapters  of  Erie  and  Other  Essays.  Boston, 
1871. 

14  George  Crouch,  Another  Chapter  of  Erie.  New  York,  1869. 

18  Milton  Reizenstein,  Economic  History  of  the  Baltimore  &  Ohio,  1827-53. 
Johns  Hopkins  University  Studies,  July-August,  1897. 

16  W.  P.  Smith,  The  Book  of  the  Great  Railway  Celebrations  of  1857.  New  York, 
1858. 


BIBLIOGRAPHICAL  NOTE  393 

pilation  of  the  Laws,  Ordinances,  and  Documents  Relating  to  the 
Baltimore  and  Ohio  Railroad,  published  in  I840.1  For  the  North- 
ern Pacific  the  history  by  Smalley  covers  in  popular  style  the  period 
from  1864  to  1883, 2  the  careful  History  of  the  Northern  Securities 
Case,  by  B.  H.  Meyer,  treats  of  an  interesting  later  development,3 
chapters  in  von  der  Leyen's  book  contain  acute  and  independent 
discussions  of  Northern  Pacific  as  well  as  of  Union  Pacific  finance,4 
and  there  is  a  fifteen-page  pamphlet  by  Chapman  entitled  The 
Northern  Pacific  Railroad.5  Schlagintweit  in  1884  described  his 
travels  on  the  Santa  Fe  and  Southern  Pacific.6  Wilson  has  written 
two  volumes  upon  the  Pennsylvania  Railroad,7  while  Worthing- 
ton  8  and  Bishop  9  have  described  the  internal  improvements 
undertaken  by  the  state  of  Pennsylvania.  Ackerman  is  the  au- 
thor of  a  Historical  Sketch  of  the  Illinois  Central  Railroad,10 
and  Hollander  n  and  Ferguson  12  of  works  on  the  Cincinnati 
Southern.  Potts  13  and  Briscoe  14  have  written  on  railroads  in 

1  Laws,  Ordinances,  and  Documents  Relating  to  the  Baltimore  &  Ohio  Railroad 
Company.  Baltimore,  1840. 

E.  V.  Smalley,  History  of  the  Northern  Pacific  Railroads.   New  York,  1883. 

B.  H.  Meyer,  A  History  of  the  Northern  Securities  Case.  Bulletin  of  the 
University  of  Wisconsin,  July,  1906. 

Alfred  von  der  Leyen,  v.  supra. 

W.  W.  Chapman,  The  Northern  Pacific  Railroad.   Washington,  1880. 

Robert  von  Schlagintweit,  Die  Santa  Fe  und  Sudpacificbahn  in  Nordamerika. 
Koln,  1884. 

7  W.  B.  Wilson,  History  of  the  Pennsylvania  Railroad  Company.    Philadelphia, 
1899. 

8  T.  K.  Worthington,  Historical  Sketch  of  the  Finances  of  Pennsylvania.   Pub- 
lications of  the  American  Economic  Association,  May,  1887. 

9  A.  L.  Bishop,  The  State  Works  of  Pennsylvania.     Publications  of  Yale  Uni- 
versity, New  Haven,  1907. 

10  W.  K.  Ackerman,  Historical  Sketch  of  the  Illinois  Central  Railroad.    Chicago, 
1890. 

"  J.  H.  Hollander,  The  Cincinnati  Southern  Railway:  A  Study  in  Municipal 
Activity.  Johns  Hopkins  University  Studies,  January-February,  1894. 

12  E.  A.  Ferguson  (Compiler),  Founding  of  the  Cincinnati  Southern  Railway; 
with  an  Autobiographical  Sketch.   Cincinnati,  1905. 

13  Charles  S.  Potts,  Railroad  Transportation  in  Texas.   Bulletin  of  the   Univer- 
sity of  Texas,  Humanistic  Series,  March  i,  1909. 

14  P.  Briscoe,  The  First  Texas  Railroad.  Texas  Historical  Association  Quarterly, 
Austin,  1904. 


394  BIBLIOGRAPHICAL   NOTE 

Texas.  The  Chicago  &  Northwestern  has  published  a  volume 
called  Yesterday  and  To-day,1  which  contains  some  information. 
Hinsdale  has  worked  up  the  History  of  the  Long  Island  Railroad.2 
Bishop  has  sketched  the  history  of  the  St.  Paul  &  Sioux  City  Rail- 
road.3 Bliss  is  the  author  of  a  Historical  Memoir  of  the  Western 
Railroad.4  Cary  in  1893  described  the  Organization  and  History 
of  the  Chicago,  Milwaukee  &  St.  Paul  Railroad  Company.5  Phil- 
lips discusses  in  excellent  fashion  the  early  history  of  a  number  of 
Southern  carriers.6  The  autobiography  of  George  Francis  Train  7 
and  Smyth's  biography  of  Henry  Bradley  Plant  8  are  serviceable. 
Works  like  those  of  Van  Oss,9  Snyder,10  Carter,11  and  Spearman,12 
and  brief  descriptions  which  have  appeared  in  the  columns  of  the 
Railway  World  and  in  Moody's  Magazine,  treat  of  a  number  of 
railroads,  but  make  no  attempt  at  a  scholarly  examination  of  any 
one.  Some  general  works  like  Ringwalt's  Development  of  Trans- 
portation Systems,13  Adams'  Railroads:  Their  Origin  and  Prob- 
lems,14 Hadley's  Railroad  Transportation,15  Kupka's  Die  Ver- 
kehrsmittel  in  den  Vereinigten  Staaten  von  Nordamerika,16  Sing- 
Chicago,  1905. 

E.  B.  Hinsdale,  History  of  the  Long  Island  Railroad.  New  York,  1898. 
Judson  W.  Bishop,  History  of  the  St.  Paul  and  Sioux  City  Railroad,  1864-1881. 
M  nnesota  Historical  Society,  Collections,  vol.  x,  pp.  399-415.  St.  Paul,  1905. 
George  Bliss,  Historical  Memoir  of  the  Western  Railroad.   Springfield,  1863. 
Gary,  Organization  and  History  of  the  Chicago,  Milwaukee  &  St.  Paul  Railroad 
Company.  Milwaukee,  1893. 

6  U.  B.  Phillips,  A  History  of  Transportation  in  the  Eastern  Cotton  Belt  to  1860. 
New  York,  1908. 

7  George  Francis  Train,  My  Life  in  Many  States  and  in  Foreign  Lands.    New 
York,  1902. 

8  G.  H.  Smyth,  The  Life  of  Henry  Bradley  Plant,  Founder  and  President  of  the 
Plant  System  of  Railroads  and  Steamships  and  also  of  the  Southern  Express  Com- 
pany. New  York  and  London,  1898. 

9  S.  F.  Van  Oss,  American  Railroads  as  Investments.   New  York,  1893. 

10  Carl  Snyder,  American  Railways  as  Investments.   New  York,  1907. 

11  Charles  F.  Carter,  When  Railroads  were  New.  New  Yorkx  1909. 

"  F.  H.  Spearman,  The  Strategy  of  Great  Railroads.  New  York,  1904. 

13  Philadelphia,  1888. 

14  New  York,  1887. 

16  New  York  and  London,  1900. 
"  Leipzig,  1883. 


BIBLIOGRAPHICAL   NOTE  395 

er's  Die  Amerikanischen  Bahnen,1  Myers'  History  of  the  Great 
American  Fortunes,2  Bancroft's  History  of  the  Pacific  States,8 
and  Chronicles  of  the  Builders,4  Davidson  and  Stuve's  Complete 
History  of  Illinois,5  Hollander's  Financial  History  of  Baltimore,6 
Sanborn's  Congressional  Grants  of  Land  in  Aid  of  Railways,7 
Haney's  Congressional  History  of  Railways,8  and  Million's  State 
Aid  to  Railways  in  Missouri,9  contain  incidental  information 
about  individual  railroads. 

These  books  are  of  service.  Their  number  is,  however,  small 
and  their  scope  limited.  It  is  surprising  that  a  field  so  rich  as  that 
of  the  history  of  American  railroad  systems  should  have  attracted 
so  little  attention  from  competent  students.  It  is  not  too  much  to 
say  that  the  history  of  the  Erie  by  Mott  is  the  only  comprehensive 
work  of  the  kind  which  our  literature  possesses,  and  that  is  al- 
ready thirteen  years  old. 

1  Berlin,  1909.  2  Chicago,  1910.,  *  San  Francisco,  1890. 

4  San  Francisco,  1891.         5  Springfield,  1874.  6  Baltimore,  1899. 

7  Madison,  1899.  8  Madison,  1908  and  1910.         '  Chicago,  1896. 


INDEX 


INDEX 


Abbott,  E.  H.,  290,  291. 

Accounts,  juggling  with,  Baltimore  &  Ohio, 
n,  15,  21-23;  Erie,  37?  Reading,  127;  South- 
ern, 169;  Atchison,  208-10. 

Adams,  Charles  Francis,  Jr.,  7,  232-7. 

Adams  Committee,  293-5,  29^~7>  3°2- 

Alabama  Central,  149,  151. 

Alabama  Great  Southern,  188. 

Aldrich  Committee,  221-2. 

Alexander,  E.  P.,  154,  164,  169,  note. 

Ames,  Oliver,  250. 

Anderson,  E.  E.,  40,  244,  248. 

Anthracite  coal,  see  Coal. 

Armour,  P.  D.,  31. 

Assessments,  Baltimore  &  Ohio,  6;  Erie,  35, 
44,  47,  68,  70;  Reading,  107,  in,  114,  139; 
Southern,  155-6,  181-2,  185-6  ;  Atchison, 
212-14;  Union  Pacific,  252;  Northern  Pacific, 
269,  303,  305-6;  General,  350-4. 

Atchison,  Topeka  &  Santa  Fe,  192-219,  235, 
259,  260,  277,  342. 

Atlantic  &  Great  Western,  see  New  York, 
Pennsylvania  &  Ohio. 

Atlantic  &  Pacific,  194,  195,  208,  216.  See  also 
St.  Louis  &  San  Francisco. 

Atlantic  Coast  Line,  148,  158,  161. 

Bacon,  E.  R.,  18. 

Baer,  George  F.,  in,  142. 

Baltimore  &  Ohio,  1-33,  38, 145, 169,  259,  260, 
342- 

Baltimore  Committee,  24. 

Baring  Brothers  &  Co.,  n,  215. 

Bartol  Committee,  103,  104-5. 

Belen,  218. 

Belmont,  August,  &  Co.,  oppose  Erie  reorgan- 
ization plan,  63-6;  lead  opposition  to  Adams 
Committee,  290;  members  of  Northern  Pa- 
cific reorganization  committee,  296,  note;  of 
Northern  Pacific  voting  trust,  307;  under- 
write Northern  Pacific  mortgage,  274. 

Bigelow,  F.  G.,  300,301,  308. 

Blanchard,  George  R.,  2,  3. 

Boissevain,  A.  H.,  242-4,  245-7. 

Bond,  Frank  S.,  89,  90,  91 ;  plan  of  reorganiza- 
tion by,  92-5;  95-6. 

Boston   &  Maine,  122,  124,  126,  127-8. 

Boston,  Hartford  &  Erie,  36. 

Branches,  Baltimore  &  Ohio,  9-10;  Erie,  51- 
3»  57  >  59~6o,  74;  Southern,  168;  Atchison, 
196-8,  217-18;  Union  Pacific,  230-31, 232-3, 
236,  248-9,  250-51,  253-4;  Northern  Paci- 
fic, 275,  276,  277-8,  286-7,  *9i»  192*  304. 


306-7;  Rock  Island,  315-16,  319-20,  328- 

31;  General,  369-71. 
Brice,  Calvin  S.,  150,  160,  244. 
Brown,  Shipley  &  Co.,  9,  n. 
Buffalo,  New  York   &  Erie,  38. 
Burleigh,  Andrew  F.,  300,  301. 

Cable,  R.  R.,  314. 

Caldwell,  Stephen  A.,  81,  82,  97. 

Capitalization,  Baltimore  &  Ohio,  I,  9,  11; 
Erie,  34,  35,  36,  39,  44,  48,  71-2;  Reading, 
75-6,  82,  101,  115,  138,  141;  Southern,  151, 
183-4,  186;  Atchison,  198,  200,  211,  219; 
Union  Pacific,  221-4,  225,  227,  229,  232, 
236,  251;  Northern  Pacific,  264,  266,  268, 

271,  275,  276,  278,  279,  302,  304;  Rock 
Island,  311-12,  315,  318,  note,  322,  331,  332- 
3;  General,  339,  363-9,  372-4,  374-9. 

Cash  requirements  and  floating  debt,  Balti- 
more &  Ohio,  11-15,  2^~75  Erie»  34~5>  4°» 
54,  55-6,  61,  68;  Reading,  79,  81-2,  101, 
124-6, 127, 133, 139;  Southern,  152, 156, 160, 
note,  168,  173,  182,  186;  Atchison,  197,  199- 
200,  213;  Northern  Pacific,  266-7,  267-9, 

272,  274,  276,  287-9,  295»  3°4-6J  General, 
348-56. 

Cass,  George  W.,  266,  267. 

Central  of  New  Jersey,  9,  10;  leased  by  Read- 
ing? 97~9>  "7,  i 2°,  122;  shares  purchased  on 
margin,  99-100. 

Central,  New  England  &  Western,  123. 

Central  Railroad  &  Banking  Company  of 
Georgia,  162-6,  169,  175-8,  188. 

Charlotte,  Columbia  &  Augusta,  147,  159. 

Chicago  &  Alton,  Harriman  buys  stock  in,  259, 
331;  Rock  Island  buys  stock  in,  330,  331; 
reorganization  of,  337. 

Chicago  &  Atlantic,  52,  54,  57,  62. 

Chicago  &  Northern  Pacific,  283-4,  286,  287 ; 
loss  on  operation  of,  289,  291-2;  Northern 
Pacific  abandons  lease  of,  290,  302,  308. 

Chicago,  Burlington  &  Quincy,  277,  310,343. 

Chicago,  Indianapolis   &  Louisville,  189. 

Chicago,  Milwaukee   &  St.  Paul,  259,  343. 

Chicago  Terminal  Transfer  Company,  33,  283; 
Northern  Pacific  sells  stock  in,  308. 

Childs,  Attorney-General,  298. 

Choctaw,  Oklahoma  &  Gulf,  319-20,  328. 

Cincinnati,  Hamilton  &  Dayton,  52-3,  57,  74. 

Cincinnati,  New  Orleans  &  Texas  Pacific,  189. 

Clark,  S.  H.,  240,  253. 

Clyde,  W.  P.,  174-8. 

Coal,  development  of  Erie's  traffic  in,  38,  50-1, 


400 


INDEX 


73;  interest  of  Reading  in,  76-81,  97,  99, 
118-23,  125~6»  HI.  H3»  >45»  3"' 

Coal  &  Iron  Company,  Reading,  77,  80-83, 
88,  92,  97,  101,  118-20, 123, 127, 139, 141-4. 

Colby,  Charles  L.,  290. 

Colorado  Midland,  203,  205,  212. 

Columbia    &  Greenville,  159,  160,  note,  168. 

Committee  of  Investigation,  Baltimore  &  Ohio, 
15-16,  21 ;  Erie,  37,  40,  55-6;  Reading,  84, 
119;  Southern,  152,  170,  177;  Atchison,  199- 
200;  Northern  Pacific,  285-6. 

Committee  of  Reorganization,  see  Reorganiza- 
tion Committee. 

Competition,  a  cause  of  railroad  failure,  340-1. 

Consolidation,  through  reorganization,  370-1. 

Contracts,  trackage  and  traffic,  Baltimore  & 
Ohio,  9;  Erie,  52;  Reading,  121;  Southern, 
149;  Atchison,  193-5,  2I7>  Northern  Pacific, 
275,  283-4,  308. 

Cooke,  Jay,  interested  in  Northern  Pacific,  264; 
failure  of,  79,  265. 

Cooley,  Thomas  M.,  7. 

Coppell,  George,  128,  175. 

Corbin,  Austin,  117,  118,  120. 

Coudert,  F.  R.,  241. 

Cowen,  J.  K.,  20,  29-30. 

Credit  Mobilier,  223-4. 

Cullom  Committee,  Albert  Fink  testifies  be- 
fore, 7. 

Davis,  J.  C.  Bancroft,  35. 

Davis,  John  P.,  222-3,  224- 

Deferred  income  bonds,  81,  84-6,  87-8,  90,  96, 

"5- 

Delaware,  Lackawanna  &  Western,  120-1. 

Denver  Pacific,  227,  228-30. 

Depew,  Chauncey  M.,  250. 

Deutsche  Bank,  supports  Henry  Villard,  273; 
294;  underwrites  Northern  Pacific  reorgan- 
ization plan,  296,  304  ;  307. 

Differentials,  between  eastern  seaboard  cities, 
5,  7;  between  stronger  and  weaker  roads, 

17- 

Dillon,  Sidney,  233,  234,  237. 

Dressed  beef,  rates  cut  on,  17. 

Doane,  John  W.,  241. 

Drew,  Daniel,  34,  36. 

Drexel,  Anthony  J.,  125,  126,  134. 

Drexel,  Morgan  &  Co.,  take  part  in  Erie  reor- 
ganization, 62,  65,  66-9;  in  Southern  reor- 
ganization, 167-8,  175,  178-86;  underwrite 
Northern  Pacific  mortgage,  274. 

Dunan,  S.  H.,  37. 

Durant,  T.  C.,  223. 

Earle,  George  H.,  Jr.,  135. 
East  Tennessee,  Virginia  &  Georgia,  see  South- 
ern Railway. 
Employees,  reorganization  of  the  service,  15, 


234;  wages  reduced  or  delayed,  37,  39,  41, 
79,  81,  100,  199,  234;  wages  high,  222. 

Equipment,  Baltimore  &  Ohio,  23,  28,  31; 
Erie,  73;  Reading,  144;  Southern,  168,  189, 
190;  Atchison,  218;  Union  Pacific,  261; 
Northern  Pacific,  309. 

Equitable  Life  Assurance  Company,  288. 

Erie,  2,  7,  17-18,  34-74,  342. 

Erlanger  Roads,  166,  167,  185. 

Excelsior  Enterprise  Company,  see  National 
Company. 

Express  companies,  12,  14. 

Fairchild,  C.  S.,  170. 

Fink,  Albert,  6,  7,  10. 

Fink,  Henry,  154. 

Fisk,  Jim,  36. 

Fitzgerald,  General  Louis,  takes  part  in  Balti- 
more &  Ohio  reorganization,  24;  in  Reading 
reorganization,  136,  138;  in  Union  Pacific 
reorganization,  244-5,  25°>  25I-4»  m  North- 
ern Pacific  reorganization,  293 ;  examines 
Richmond  Terminal  properties,  170. 

Fixed  charges,  Baltimore  &  Ohio,  8,  10,  16, 
20,  22,  28,  342,  357-9;  Erie,  35,  36,  38,  39, 
48,  58,  66,  69, 72,  73-4,  342,  357-9;  Reading, 
75,  82,  94,  96,  101,  115,  1 1 6,  1 1 8,  139-40, 
H4-5»  342.  357-9;  Southern,  152,  155,  173, 
1 80,  186-7,  342»  357-9;  Atchison,  197-9, 
203, 213, 216,  218, 342, 357-9;  Union  Pacific, 
224-5,  227,  229»  235~6>  25r»  253~4,  26i,  342> 
357-9;  Northern  Pacific,  266,  271,  275,  284, 
293.  3°4>  3IO>  342>  357~95  Rock  Island,  312, 
322»  357-95  General,  357-61,  363-5,  369- 
ya. 

Fleming,  Robert,  45-6,  155,  216. 

Floating  debt,  see  Cash  requirements  and  float- 
ing debt. 

Foreclosure,  Baltimore  &  Ohio,  28-9;  Erie,  34, 
35,  49-50,  73;  Reading,  82,  141;  Southern, 
157,  187,  188;  Atchison,  216;  Union  Pacific, 
254-7;  Northern  Pacific,  270,  308. 

Foreign  investors,  Erie,  36,  37, 40-50,  55-6,  63 ; 
Reading,  82,  83,  84,  86-9,  91,  96,  119,  126; 
Southern,  155;  Atchison,  206,  207-8,  210, 
214, 215;  Union  Pacific  244;  Northern  Pacific, 
264,  273. 

Garrett,  John,  4,  9. 

Garrett,  John  B.,  106,  114. 

Garrett,  Robert,  9,  16. 

Gauge,  on  Erie,  34,  37,  38,  45,  51. 

Georgia  Central  Company,  164,  165,  177-8. 

Georgia  Pacific,  149,  166. 

Gorman,  Senator  A.  H.,  13. 

Gould,  Jay,  prominent  in  Erie,  36;  194;  causes 
combination  of  Union  Pacific  and  Kansas 
Pacific,  226,  228-30;  unloads  branch  roads 
on  Union  Pacific,  230-31;  233,  237. 


INDEX 


401 


Gowen,  F.  B.,  76,  81,  84,  86,  87-91,  95-7,  99, 

101,  111-15,  118-19,  I2°- 
Grand  Trunk,  2,  6,  7,  17,  18. 
Grant   &  Ward,  54. 
Great  Northern,  258,  259,  277;   proposes  to 

guarantee  Northern  Pacific   bonds,   296-8, 

309-10. 

Gregory,  Dudley  S.,  35. 
Guarantee  fund,  199,  203. 
Gulf,  Colorado  &  Santa  Fe,  196,  202,  205, 

218. 

Hallgarten  &  Co.,  on  Reading  underwriting 
syndicate,  139;  on  Southern  reorganization 
committee,  171;  oppose  Erie  reorganization 
plan,  63-6. 

Harriman,  E.  H.,  32-3,  63-6,  188,  218,  258-60, 
309-10,  331. 

Harris,  Joseph  S.,  77-8,  83,  97, 125-8,  129, 131. 

Harris,  Robert,  275. 

Hartshorne  Committee,  136. 

Hepburn  Committee,  Albert  Fink  testifies  be- 
fore, 7. 

Higginson,  H.  L.,  206,  245. 

Hill,  J.  J.,  buys  interest  in  Baltimore  &  Ohio, 
31-2;  struggle  with  Harriman,  258,  310; 
proposed  guarantee  of  Northern  Pacific 
bonds,  296-8,  307. 

Hollins,  H.  B.,  165,  179,  188. 

Hooper,  John,  344. 

Houston    &  Texas  Central,  328-9,  355. 

Houston  East   &  West  Texas,  329. 

Hoxie,  H.  M.,  223. 

Huidekoper,  F.  W.,  176,  177,  note. 

Huntington,  Collis  P.,  194,  258. 

Illinois  Central,  19,  146,  259-60,  343. 

Improvements,  Baltimore  &  Ohio,  15,  23,  28, 
30-31;  Erie,  42,  51,  60,  73;  Reading,  80-81, 
118,  144;  Southern,  152,  168,  170,  189,  190; 
Atchison,  202,  note,  204,  212,  218-19;  Union 
Pacific,  234,  260-1;  Northern  Pacific,  276, 
278-9,  309;  Rock  Island,  332,  333. 

Income  bonds,  203-5;  before  and  after  reor- 
ganization, 365-6.  See  also  Deferred  income 
bonds. 

Inman,  John  H.,  164,  165. 

Iselin,  A.   &  Co.,  139. 

Ives,  Brayton,  285,  287-8;  president  of  North- 
ern Pacific,  290;  secures  removal  of  receivers, 
291-2,  298-9;  294,  295;  endorses  Northern 
Pacific  reorganization  plan,  302. 

Jenkins,  Judge,  289,  292,  300,  301. 
Jewett,  H.  J.,  39,  40,  41,  49,  50-53,  55,  57. 
Joint  Executive  Committee,  6. 
Joint    Executive    Reorganization    Committee, 

210-16. 
Junior  Securities  Protective  Committee,  137. 


Kansas  Pacific,  poor  condition  of,  225;  attempt 
at  reorganization  of,  226-7;  consolidated 
with  Union  Pacific,  228-30;  sale  of,  256-7. 

King,  Edward,  206,  210-16. 

King,  John,  55,  57,  59,  note,  61. 

Kuhn,  Loeb  &  Co.,  take  part  of  securities 
issued  under  Baltimore  &  Ohio  reorganiza- 
tion plan,  26;  oppose  Erie  reorganization 
plan,  63-6;  represented  on  Richmond  Ter- 
minal investigating  committee,  170;  on 
Union  Pacific  reorganization  committee,  250; 
agree  to  take  Northern  Pacific  collateral  trust 
bonds,  288. 

Lacombe,  Judge,  61,  300,  301. 

Lake  Shore   &  Michigan  Southern,  3,  18,  32, 

'45- 

Land  grants,  see  State  and  federal  aid. 

Leases,  Baltimore  &  Ohio,  2,  27;  Erie,  51-3, 
56,  58,  59-60,  71-2,  74;  Reading,  97-9,  117, 
120,  122,  123,  128,  130;  Southern,  147,  148, 
149,  159,  161-2,  166,  188;  Atchison,  197; 
Northern  Pacific,  276,  283-4. 

Leeds,  W.  B.,  317-18. 

Lehigh  Valley,  74,  75;  leased  to  Reading,  120, 
122,  123,  128-9,  ^o.  *33- 

Lehigh  Valley  Terminal  Railroad,  128. 

Lewis,  Edwin  A.,  81-2,  97. 

Lewis,  Howard,  119. 

Little,  Stephen,  report  on  Baltimore  &  Ohio, 
21-3;  on  Atchison,  208-10,  213;  set  to  work 
on  the  Reading,  128. 

Live  stock,  17. 

Livingston,  Johnston,  294,  307. 

Lockwood,  E.  Dunbar,  106,  112,  117. 

Logan,  T.  M.,  forms  Georgia  Central  Com- 
pany, 164;  seeks  control  of  Richmond  Ter- 
minal, 164-6. 

Long  Dock  Company,  58. 

Lord,  N.  P.,  345. 

Loree,  S.  F.,  33. 

Louisville  &  Nashville,  146,  149. 

Maben,  J.  C.,  175,  note,  178. 

McCalmont  Brothers,  86-91,  96. 

McCormick,  Attorney-General,  143. 

McCullough,  J.  G.,  61. 

McGill,  Chancellor,  122. 

McHenry,  E.  H.,  300,  301,  308. 

McHenry,  James,  39-40,  49. 

McLeod,  A.  A.,  leases  Lehigh  Valley,   120; 

extends  Reading  into  New  England,  122-5; 

statement   by,    125-6;   resigns   by   request, 

126-7  5   J32t 

Macon   &  Brunswick,  149,  151. 
Manville,  Allen,  202. 
Maryland,  subscribes  to  Baltimore    &  Ohio 

stock,  i,  18. 
Mayer,  Charles  F.,  16,  18-20. 


402 


INDEX 


Memphis  &  Charleston,  148,  158,  168,  185, 
188. 

Mercantile  Trust  Company,  206,  288,  294. 

Miller,  O.  G.,  45-6. 

Mills,  Captain  J.  H.,  300. 

Mink,  O.  W.,  240,  253. 

Missouri  Pacific,  196,  229. 

Mobile  &  Birmingham,  146,  167,  168,  185, 
188. 

Mobile   &  Ohio,  189,  329. 

Moore,  James  H.,  318. 

Moore,  William  H.,  interested  in  Rock  Island, 
317-18;  reorganization  plan  by,  321-6;  buys 
St.  Louis  &  San  Francisco,  327-8;  extends 
Rock  Island  to  the  Gulf,  328-30;  relations 
with  Chicago  &  Alton,  330-1 ;  distrusted  by 
investors,  332. 

Morgan,  J.  P.  &  Co.,  organize  syndicate  to 
relieve  Baltimore  &  Ohio,  11-13;  se^  Cin- 
cinnati, Hamilton  &  Dayton  to  Erie,  74; 
reorganize  Reading,  108-11,  139,  140,  141; 
members  of  Southern  voting  trust,  188;  of 
Union  Pacific  reorganization  committee,  245; 
take  part  in  Northern  Pacific  reorganization, 
296,  304,  307. 

Morgan,  J.  S.  &  Co.,  n,  69. 

Morris,  John,  40,  41. 

Mullen,  Attorney-General  C.  W.,  327. 

National  Company,  see  Philadelphia  &  Read- 
ing- 
New  capital,  provision  for,  379-82. 

New  York   &  Erie,  34,  35. 

New  York   &  New  England,  123,  124,  356. 

New  York  Central,  2-7,  17,  35,  38,  259,  343. 

New  York,  Lake  Erie   &  Western,  see  Erie. 

New  York,  Pennsylvania  &  Ohio,  leased  by 
Erie,  51-3,  59-60;  70-2. 

Norfolk   &  Western,  149,  151,  355. 

Northern  Pacific,  18,  19,  232,  236,  258,  263- 

3i°»  3*5>  34*- 

Northern  Pacific  &  Manitoba,  292,  306. 
Northern  Securities  Company,  258,  259. 
Notes,  short  time,  Atchison,  199,  203;  Union 

Pacific,  237,  250,  251,  257;  Northern  Pacific, 

287-9. 

Oakes, ,  287,  289,  291,  292,  293,  299-300. 

Oakman,  W.  G.,  176. 

Olcott,  F.  P.,  prominent  in  Reading  reorganiza- 
tion, 135-6,  138,  140;  in  Southern  reorgan- 
ization, 155,  note,  171-4,  179. 

Olney,  Richard,  243. 

Oregon  &  Transcontinental  Company,  272-3, 
*75»  2?6. 

Oregon  Railway  &  Navigation  Company, 
236-7,  245,  249,  257,  272-3,  275-6. 

Oregon  Short  Line,  232-3,  236,  249,  257, 
276. 


Patterson  &  Corwin,  criticise  Mr.  Little's  re- 
port on  the  Baltimore  &  Ohio,  23. 

Payne,  Henry  C.,  receiver  of  Northern  Pacific, 
289,  292,  293,  299. 

Payne,  Oliver  H.,  171,  note. 

Pearsall  vs.  Great  Northern  Railway  Company, 
298. 

Pennsylvania  Railroad,  2-8,  10,  17,  31-3,  38, 
87,  108-10,  143,  147,  148. 

Perham,  Josiah,  264,  note. 

Pennsylvania  Coal  Company,  74. 

Pere  Marquette,  74. 

Philadelphia  &  Reading,  9,  10,  18,  32,  75-145. 

Philadelphia,  Reading  &  New  England,  123, 
128. 

Pierce,  W.  S.,  243,  252,  253. 

Port  Reading  Railroad,  120,  122. 

Poughkeepsie  Bridge,  123. 

Powell,  T.  W.,  55,  56,  57-8,  84. 

Preferred  stock,  use  of,  in  reorganizations, 
366-8. 

Prevost,  S.  M.,  31. 

Railroad  failure,  causes  of,  336-42. 

Rate  agreements,  4-7,  275. 

Rates,  3-5,  6-8,  17,  235. 

Rate  wars,  3-5,  6-8,  17,  34-5,  38,  53,  196-7, 
240. 

Ream,  Norman  D.,  31. 

Receivers,  Baltimore  &  Ohio,  20,  23,  28,  29; 
Erie,  35,  36,  38-9,  50,  61 ;  Reading,  81-2,  97, 
loo-i,  117,  125-6,  127,  133-4;  Southern, 
175,  176,  187;  Atchison,  205;  Union  Pacific, 
240-1,  248-9;  Northern  Pacific,  289,  291-2, 
*95»  298-301. 

Receivers'  certificates,  23,  68,  127,  293. 

Reinhart,  Joseph  H.,  202,  204,  205,  209-10. 

Reid,  D.  G.,  317-18. 

Rentals,  reduced  through  reorganization,  369- 
72. 

Reorganization,  definition  of,  335;  causes  of, 
336-42;  cancellation  of  floating  debt  by,  348- 
56;  reduction  of  fixed  charges  by,  357-72; 
distribution  of  losses  under,  361-2,  368-9, 
376-7;  general  principles  of,  384-6. 

Reorganization  committees,  Baltimore  &  Ohio, 
21,  24,  29;  Erie,  35,  40,  45-6,  55-6,  61-2, 
63-5;  Reading,  82,  84,  86,  101,  103-5,  II2» 
114, 117, 126, 128, 133-5, 138;  Southern,  152, 
155,  170,  171,  174,  175,  178-9;  Atchison, 
199-200;  206-8,  210,  215,  216;  Union  Pa- 
cific, 244-5,  249~5°>  257'»  Northern  Pacific, 
267,293-4,308;  General,  343-5. 

Reorganization  plans,  Baltimore  &  Ohio,  24-8 ; 
Erie,  34,  35,  41,  42, 43-9,  57-8,  61-5,  66-73; 
Reading,  83-6,  91-4,  96-7,  101-3,  104-5, 
106-8,  110-13,  114-16,  129,  133-4,  135-6, 
138-40;  Southern,  152-3,  155-6,  171-4, 
179-84,  185-6,  187;  Atchison,  200-2,  204, 


INDEX 


403 


206-8,  211-16;  Union  Pacific,  226-7,  228- 
30,  241-4,  245-8,  250-4;  Northern  Pacific, 
265-6,  267-70,  296-8,  302-8;  Rock  Island, 
312-13,  321-4. 

Reorganization  trustees,  for  Erie,  35,  47;  for 
Reading,  104-5,  106,  107-10,  114. 

Resolutions,  Baltimore  &  Ohio,  15,  39;  com- 
plimentary to  Mr.  Gowen,  99;  by  London 
bondholders'  committee,  207;  by  Northern 
Pacific  bondholders,  268;  by  Northern 
Pacific  preferred  stockholders,  281,  285, 
note;  by  Northern  Pacific  directors,  285. 

Rice,  I.  L.,  121,  124,  127,  132,  136,  164-6. 

Richmond  &  Danville,  see  Southern  Railway. 

Richmond  &  West  Point  Terminal  Railway  & 
Warehouse  Company,  10,  18;  see  Southern 
Railway. 

Riddle,  Hugh,  314. 

Ripley,  E.  P.,  216. 

Roberts,  George  B.,  109,  no. 

Rock  Island,  196,  277,  311-33,  337,  343- 

Rockefeller,  J.  D.,  288. 

Rouse,  Henry  C.,  289,  292,  293,  295,  299. 

Ryan,  Thomas  F.,  178. 

St.  Joseph  &  Grand  Island,  249,  259. 

St.   Louis    &   San   Francisco,   controlled   by 

Atchison,  194,  202,  216;  by  Rock  Island, 

327-8,  329,  330,  356.  > 
St.  Paul    &  Northern  Pacific,  287,  288,  290, 

296. 
St.  Paul,  Minneapolis  &  Manitoba,  see  Great 

Northern. 

Saratoga  agreement,  4. 
Schiff,  Jacob  H.,  170,  250. 
Securityholders,  divergence  in  interest  between, 

335- 

Selma,  Rome   &  Dalton,  149,  151. 

Sickles,  General  Daniel  E.,  86. 

Siemans,  George,  represents  Deutsche  Bank, 
307. 

Simmons,  J.  Edward,  128,  134. 

Sonora  Railroad,  194,  197,  217. 

Southern  Kansas  Railway  Company,  196. 

Southern  Pacific,  193-5,  217,  258. 

Southern  Railway,  146-91,  330,  342. 

Southern  Railway  Security  Company,  148. 

Speer,  Judge,  176. 

Spencer,  Samuel,  12-13;  president  of  Balti- 
more &  Ohio,  15,  16;  of  Southern  Railway, 
187;  killed,  191. 

Speyer   &  Co.,  26,  125,  333. 

Speyer  Bros.,  see  Speyer   &  Co. 

Stanton,  Henry,  289,  note. 

State  and  federal  aid,  Baltimore  &  Ohio,  i; 
Erie,  34;  Richmond  &  Danville,  146;  East 
Tennessee,  147;  Atchison,  192,  194;  Union 
Pacific,  220-1,  225,  238-40,  241-4,  249, 
254-7;  Northern  Pacific,  263-6,  271. 


Staten  Island  Rapid  Transit  Company,  10,  29. 

Stockholders'  Protective  Committee,  215,  296, 
302. 

Stockton,  Attorney-General,  121-2. 

Strong,  W.  E.,  prominent  in  Southern  reor- 
ganization, 174-5,  17%>  president  of  the 
Atchison,  194-5,  202. 

Sully,  Alfred,  133,  160,  164. 

Surplus,  on  Baltimore  &  Ohio,  15,  22;  on 
railroads  in  1893,  342-3. 

Syndicates,  Baltimore  &  Ohio,  11-15,  2O»  2*>; 
Erie,  68,  69;  Reading,  86,  108-10,  113-15, 
1 20,  134,  139;  Southern,  150;  Union  Pacific, 
226,  237,  252;  Northern  Pacific,  264-5,  27*t 
274,  276,  288,  296,  304;  General,  345-8. 

Syndicates,  compensation  to,  Erie,  69 ;  Reading, 
109,  m,  112;  General,  347-8. 

Tappen,  F.  D.,  155,  note,  171,  note. 
Terminals,  of  Baltimore    &  Ohio,  3-4,  9-10, 

19,  33 ;  of  Erie,  58;  of  East  Tennessee,  152; 

of  Atchison,  217;  of  Northern  Pacific,  283-4, 

302,  308;  of  Rock  Island,  300. 
Texas  &  Pacific,  194,  330,  356. 
Texas  Railroad  Commission,  329. 
Thomas,  General  Samuel,  160,  174,  175. 
Thurman  Act,  238-9,  242. 
Trunk  lines,  see  Rate  wars. 
Trunk-line  arbitrators,  letter  of  Mr.  King  to,  6. 
Tyler,  Captain,  report  of,  37. 

Union  Pacific,  32-3,  220-62,  275-6,  277,  310, 

342. 
United    States    Government,    relations    with 

Union  Pacific,  220,  221-2,  238-40,  241-4, 

249,  252-3,  254-6;   with  Northern  Pacific, 

263-4,  265-6. 
United   States  Supreme  Court,  decisions  by, 

238,  239,  298,  301. 

Valuation,  of  Reading  coal  properties,  77-8, 
'  82-3. 
Vanderbilt,  Commodore,  36,  95-6,  100,  314- 

*5- 

Van  Nostrand,  294. 
Vermilye   &  Co.,  63-6. 
Villard,  Henry,  237,  272-4,  275,  281-3,  286~7» 

288,  290,  291-2. 
Virginia,  subscribes  to  stock  of  Baltimore    & 

Ohio,  I ;  aids  Richmond   &  Danville,  146. 
Virginia  Midland,  150,  159,  160,  note. 
Voting  trusts,  Baltimore   &  Ohio,  18-19,  27, 

32;  Erie,  67;  Reading,  in,  115,  119,  140; 

Southern,  183,  188;  Atchison,  201,  212-13; 

Northern  Pacific,  303,  307,  310;  General, 

382-4. 

Walker,  Major  Aldace  F.,  209,  216,  117. 
Watkin,  Sir  Edward,  40,  41,  43-5. 


404 


INDEX 


Watson,  P.  H.,  38,  39. 

Welsh,    John    Lowber,    108-10,    in,    128, 

*34- 
Western  Union  Telegraph  Company,  14,  22, 

27. 
Westlake,  J.,  55,  56,  57-8. 


Whelen,  Townsend,  101-3,  |O4>  1O4~5>  108, 

112. 

Wilbur,  E.  P.,  125,  127,  128. 
Winslow,  Lanier  &  Co.,  274. 
Wisconsin  Central,  leased  to  Northern  Pacific, 
283-4,  286»  l89>  200-92,  302,  308. 


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